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Why Doesn’t Obama End the Hedge Fund Tax Break?

Slate.com – The Obama administration could disable one of the most powerful sources of wealth and income inequality in our country. Yet no one ever mentions it as a possibility. Don’t they know?

There have always been disparities in income, of course, but the gap now isn’t so much between the rich and poor as between the super-rich and everyone else. There’s no more dramatic example of this than the astronomical income of hedge fund managers and traders, and the special tax break that allows them to pocket so much of that income. The most remarkable aspect of this fabulous new wealth is that much of it is simply a gift from the government—a gift that could be eliminated by the stroke of a pen.

A quick refresher on how the tax break works: An executive salary is taxed at 39 percent, the highest rate for earned income. But the income of a hedge fund manager is taxed at only 20 percent, which is the highest long-range capital gains rate—even though the hedge fund manager is deriving income that’s as directly earned as the wages of a steelworker. He made money when he established his fund. But the rule for hedge funds is that the “realization event”—when income is realized—is not known until later, so “carried interest” turns the income into a capital gain. This is what’s known as a legal fiction, which means that it’s a great big lie.

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