A Boston Globe news article takes Republican presidential candidate Mitt Romney to task for defending capital gains treatment for "carried interest" of managers of investment partnerships. The Globe doesn't mention that his tax plan calls for lowering the capital gains rate to zero for those with incomes below $200,000. But the most amazing part of the article is these three paragraphs:
Advocates of using the tax code to reduce income inequality are especially critical of the "carried interest" tax break. "It's probably the biggest loophole in the tax code for super-rich people," said Jacob S. Hacker, a professor of political science at Yale University and co-author of "Winner-Take-All Politics."
"The idea that private equity managers and hedge fund managers should pay 15 percent, when in fact they're just getting a cut from the pool of capital under management - it's completely egregious," Hacker said.
"There's very little risk that's being borne by these people," Hacker said. "It's a big subsidy for a certain kind of financial management."
How "completely egregious" is that? Here is a tenured professor at Yale complaining that hedge fund and private equity fund managers don't take risk? A hedge fund or private equity manager can have a money-losing year and get no carried interest at all, or his fund could go out of business and close and he could be unemployed. Clients can withdraw money, and unless you run the fund, you can get fired. None of those risks apply to tenured professors at Yale.
Meanwhile, Yale is a tax-exempt nonprofit whose $19.4 billion endowment was, at last report, 34% invested in private equity funds of precisely the sort Mitt Romney used to run. Yale pays taxes on its profits from those investments at an even lower rate than 15% — in most cases, the tax rate is zero percent.
Finally, the description of the 15% rate as applying to the "cut from the pool of capital under management" isn't even accurate. The percentage of the pool of capital (often 2%) is taxed as ordinary income. It's the percentage of gains (often 20%), and only long-term gains at that, which are taxed at the 15% rate that is the same rate that applies to long-term gains of the other partners and of everyone else.
I've made this point before about the hypocrisy of employees of tax-exempt institutions calling for private-sector individuals to pay higher taxes. And, in fairness, Professor Hacker may respond that he does pay taxes on his personal income. But even so, the whole formulation — "very little risk," "completely egregious" — is rankling. Professor Hacker's Web site reports that his research is backed by the Rockefeller Foundation, another tax-exempt nonprofit.
At a certain point, one starts to wonder about the hedge fund and private equity managers willing to pay full tuition and give big contributions to Yale so that their children can learn from, to use Professor Hacker's formulation, "these people."