Less than a month after the New Yorker took aim at the way "carried interest" of hedge fund, venture capital, and private equity managers is taxed, the New York Times weighs in with a Sunday editorial on the topic. Says the Times:
To add insult to injury, some hedge fund managers and, more commonly, private equity fund managers are able to pay a much lower rate of tax than the typical working professional.
The tax disparity results from an outdated rule that lets a money manager in a private partnership treat a chunk of his fees as if they were long-term capital gains, taxed at a special low rate of 15 percent. Fees for managing someone else's money should be taxed as ordinary income, like wages and salary, at rates as high as 35 percent.
President Obama has included a provision to end that special treatment in his most recent budget. For three years running, the House has passed a bill to close the loophole. In the Senate both Democrats and Republicans have resisted, all for fear of losing lucrative campaign donations.
Never mind that the Times is essentially calling for a huge tax increase on its hometown industry. This doesn't even accurately represent the issue at stake. For one thing, the House bill "to close the loophole" doesn't actually close it -- instead, it exempts publicly traded investment partnerships like KKR, Blackstone, and Apollo from the tax increase. Second, the 15% rate doesn't apply to all hedge fund managers' compensation, just to the carried interest, and even then just to the portion of the carried interest that comes from long-term gains. If the Times doesn't get that, here is an example that should get their attention, or at least cause them to comprehend the issue:
Between December 2007 and March 2008, two investment management firms, Harbinger and Firebrand, bought about $500 million of New York Times stock at about $18 a share. Over the past six months, with Times stock trading around $11 a share, they've reportedly sold about half the stake. That's a long term investment on which Harbinger's investors have lost tens of millions of dollars while New York Times executives Arthur Sulzberger Jr. and Janet Robinson have been borrowing money at 14% from Carlos Slim and giving their reporters 5% pay cuts while paying themselves $6 million a year. But suppose that instead of losing value, Harbinger's investment in the New York Times Company had gained in value over the period from March 2008 to March 2010. Part of Harbinger manger Philip Falcone's compensation comes as an interest in the fund. Had the NYT stock gone up, Mr. Falcone's investors would have paid the long term capital gains tax, 15%, on the shares held for the period of more than a year. Why should Mr. Falcone be taxed on the New York Times investment at the ordinary income tax rate while his investors are taxed at the lower investment rate? What the Times wants is to impose special punitive rules on long term gains for people who happen to be in the profession of money management.
It was enough to send us scrambling for the editorial the New York Sun ran back in January 2008, when news of the Harbinger-Firebrand New York Times stake surfaced. Back then, the Sun commented with a chuckle on a letter at the time from the Firebrand chief investment officer, Scott Galloway, which said, "The New York Times is the world's foremost evangelist for democracy, capitalism and culture." We asked back then, "What edition of the Times does Mr. Galloway read?" and concluded, "something tells us that by the end of this story Mr. Galloway isn't going to be describing the paper as the world's foremost evangelist for capitalism — or democracy, shareholder or otherwise."
Anyway, Mr. Galloway and Mr. Falcone would probably be more steamed about the Times's effort to raise their taxes had their investment in the Times yielded any profits that could be taxed. The whole situation is a Times classic.