HEDGE FUND FEES….You learn something new every day. Everybody knows that hedge fund managers earn astronomical fees for managing their funds, but today Jared Bernstein informs me that these fees are taxed at capital gains rates (15%), not income rates (about 35%):
The industry argues that since the lion’s share of their compensation is keyed off the appreciation of the fund, it should be treated as a capital gain. A growing number of critics disagree. Look at their job title: they’re managing other people’s money. Sure, they often reinvest their own returns, but their income from managing the fund is just that: income derived from doing their job.
This is absurd. I’m not a fan of low capital gains rates in general, but even among those who are, the rationale is that it encourages investment, which in turn helps the economy grow. But while low rates might encourage people to put their money in hedge funds in the first place, they do nothing to encourage fund managers to invest the money, which they’re going to do regardless. Lower tax rates for management fees are pure windfall.
Bernstein is right: hedge fund fees are income for doing your job. Hedge fund managers should pay capital gains rates on any money of their own that they’ve invested in their own fund, but they shouldn’t be able to do so on the fees for managing other people’s money. This is just a racket, yet another example of the super-rich ripping off the rest of us with special tax treatment. It’s time to get the pitchforks out.