Take this post from Alternet’s Smirking Chimp blog:
The top 25 hedge fund managers in the United States collectively earned $22 billion last year, and yet they have their own cushy set of tax rules. If they operated under the same rules that apply to other people—police officers, for example, or teachers—the country could cut its national deficit by as much as $44 billion in the next ten years.
Of course, this is utter nonsense.
Official estimates of revenue generated by treating “carried interest” as ordinary income rather than capital gains are far lower.
The Joint Committee on Taxation last year estimated that the change would generate around $17.7 billion over ten years. The Congressional Budget Office came in at $19 billion.
And that wasn’t just from taxing the “top 25 hedge fund managers.” It was not ever just from taxing all hedge fund managers.
The only way you get close to that $17 billion to $19 billion is from changing the tax treatment for the mangers of hedge funds, real estate partnerships, private equity firms, venture capital companies, green energy funds and every other kind of investment partnership fund.
So where does the errant Alternet $44 billion come from? They aren’t kind enough to share their math. But it is easily enough worked out.
Step 1. Take that $44 billion and figure it is all taxed as capital gains. (That’s probably wrong. It’s most likely a mix of the 2 percent fee of assets under management—which can be quite substantial for the biggest, multi-billion hedge funds and which is taxed as ordinary income—and the 20 percent of the gains about minimum threshold—the part that may be taxed as a capital gain.)
Step 2. Figure out the difference between the top capital gains rate—15 percent—and the top marginal rate—35 percent. Come up with a figure of 20 percent points.
Step 3. Multiply $22 billion by 0.2 to arrive at a revenue number of $4.4 billion per year. (Which assumes that hedge fund managers would not take steps—such as restructuring their partnerships or moving them off-shore—to avoid the taxes.)
Step 4. Multiple $4.4 billion over ten years. (This assumes that hedge fund payouts are invariable—which, of course, they aren’t.)
Step 5. Declare $44 billion in revenue over a decade.
This kind of thing is no doubt written to persuade those already inclined to support raising taxes on hedge fund managers their cause is rational and just. But it is so far off base that it amounts to the left intentionally misleading its own side to bolster morale.
Let’s hope this strategy of creating public ignorance and intentionally introducing error about taxes doesn’t turn out to be a winning strategy.
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