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The Carried Interest Rule Needs to be Abolished

There has been much debate recently over Mitt Romney and his paying only 14% of his gross income in taxes in 2010 and still only 17.5% after itemized deductions (see his tax return at http://www.washingtonpost.com/wp-srv/politics/documents/romney-2010-tax-return.html). This is the same percentage of taxes that a single person making only $60,000 would pay. Does this sound fair to you? Now how does a business man making over $21,000,000 pay less than this single person? He does this with one of the multitude of tax benefits that the rich enjoy, the carried interest rule.

The carried interest rule is a tax law that many hedge fund managers enjoy including Romney and hedge fund managers like John Paulson. These people organize a partnership, get many investors to give them money to be limited partners, and invest it how they see accordingly. They can invest in businesses, stocks, options or land and agree to give the managers a certain percentage of the profits. Since the underlying asset is capital in nature, they are taxed at the capital gains rate of 15%, even though this is usually their only source of income.

Now to John Paulson. This is a hedge fund manager who in two years during the economic crisis made the biggest profits ever by an individual, $9,000,000,000. This profit wasn’t made by doing some benefit to society, but exactly the opposite. It was made by simply making bets that the housing market would tank (which it inevitably did) and the next year by betting that gold would go up. It seems to me that there is a huge problem in the tax code when somebody who does no benefit to society gets taxed less than the average person with a college degree. In fact, some of the bail out money that was given to banks to keep them liquid was just given to them as a conduit to Paulson so he could collect on his bets. This taxation doesn’t seem fair to me, but at least Paulson’s Advantage Plus fund can’t beat karma like it can the system, it lost 51% in 2011 by investing in Bank of America and Citigroup, among others.

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