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Tuesday, June 1, 2010
Norquist Misleadingly Frames Tax Change
Topic: Newsmax

Grover Norquist writes in a May 27 Newsmax column:

The House “extenders package” has a pair of tax increases on investment partnerships (Sec. 411 and 412). Investment partnerships consist of a “general partner” who makes investment decisions for the partnership.

It also consists of “limited partners” who contribute money to the partnership. Limited partners are usually large investors like defined-benefit pension plans, university endowments, and charities.

The two tax hikes in question each involve the general partner. A general partner is usually compensated under a system known as “2-and-20,” or a similar arrangement. 

Are you asleep yet? That's what Norquist wants. He drones on about this for pretty much the entire column, never once uttering the common term the "general partner" of such "investment partnerships" are much better known as: hedge fund managers.

Norquist also misleadingly frames the tax change itself, portraying it as a "157 percent tax hike on general partners of investment firms." What it actually does is change the hedge fund manager's portion of income (also known as "carried interest") that had been designated as capital gains -- and taxed at the capital gains rate of 15 percent -- to being taxed as income, at the higher marginal rate of up to 35 percent. Norquist doesn't make clear that the rate is marginal, or that only the highest-income earners would be subject to it.

Needless to say, people who aren't trying to hide the fact that it's hedge fund and private equity managers who will be the ones paying more in taxes have a different take. Derek Thompson of the Atlantic points out that current law "amounts to quite the tax break for private equity managers. Their primary source of income is taxed at half rate as long-term capital gains, even if the managers' own capital contributed little or nothing to the gains."

Chuck Marr of the Center on Budget and Policy Priorities adds: "there’s no logical reason why a leveraged buyout (LBO) specialist at a private equity firm should be taxed differently than a mergers and acquisitions expert at an investment bank (who pays as much as 35 percent in taxes), since both people are doing basically the same kind of work."

Even Warren Buffett has said on the issue, "If you believe in taxing people who earn income on their occupation, I think you should tax people on carried interest."

Let's see, Grover Norquist or Warren Buffett? We'll go with the latter.

Posted by Terry K. at 12:04 AM EDT

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