Wednesday, June 20, 2007

"Money Is The Mothers Milk of Politics"

I think that quote belongs to Tip O'Neil The famous Boston politician.

Roiling, boiling with envy, lust and righteous indignation the Democrats have pursued their White Whale of "the Rich" for several decades. In their pursuit of this legendary creature, they have tied the Middle Class in rules, regulations and wrapped them in snares of iron as they have taxed them most heavily... The FAMOUS ALTERNATIVE MINIMUM TAX (AMT) was set as a trap for 21 millionaires who used the standard loop holes of state taxes, home mortgage and child exemptions to pay zero federal taxes in a single year. THIS OUTRAGE could not continue. Congress passed the AMT and next year some 20+ million taxpayers will find themselves facing this extra assault upon their earnings.

In the same spirit, Congress read about the large reward coming to Stephen Schwatrzman, CEO of Blackston Group, and like Ahab felt that old familiar yearning...

because the indiscriminate flood of capital that makes Mr. Schwarzman's riches possible shows no signs of abating. And stunning, because, at 15% for most of his earnings, Mr. Schwarzman's tax rate could be less than his chauffeur's.

Should Mr.
Schwarzman's firm be allowed to sell shares to the public without paying corporate tax? Tax experts tell me that to do this, Blackstone -- and Fortress before it -- are taking advantage of a provision in the tax law that permits partnerships to be publicly traded, but only if they engage primarily in "passive" activities, a sop given two decades ago to oil, gas and timber partnerships. Blackstone claims it qualifies because its investments in the companies it buys are largely passive.

... as a matter of public policy, it's fair to ask: Why should the tax laws discourage private-equity firms from going public? To do so seems to favor fat cats and big pension funds at the expense of ordinary investors.

The dilemma for Congress is that private-equity firms aren't the only ones caught in this maze. All sorts of partnerships, including real-estate and oil and gas, rely on the same tax trick. Changing the rules makes sense. But its effects would reach far beyond private equity.

If all this seems hopelessly complex, there is a simpler solution -- abolish the lower tax rate on capital gains altogether. That would eliminate the carried-interest problem, ensure that even the fattest of cats pay their fair share, and also eliminate the lion's share of complexity in today's tax code. With the world awash in investment capital, legislators could argue, there's no need for a tax incentive to encourage more.

To compound the question is the combination of LARGE AMOUNTS OF MONEY and the 2008 POLITICAL SEASON... Democrats lust to take control of the presidency and both the House and the Senate...

Hedge funds spent $1.3 million lobbying Congress last year, a 46 percent increase from 2002, according to numbers compiled by the Center for Responsive Politics and Absolute Return magazine, an industry trade publication that tracks the largest hedge funds twice yearly. Hedge fund managers are also giving more to political campaigns; executives at the nation's 30 biggest funds increased their political donations by nearly 17 percent to $14.7 million between 2004 and 2006, the records show.

These amounts are pocket change for an industry managing more than $1.4 trillion in assets. But
giving Washington any money at all reflects a major attitude adjustment in the hedge fund world. Traditionally, the industry's government relations strategy was to simply stay home.

Avoidance worked well for many years. Since the first hedge fund was founded in 1949, government regulators have largely left the funds alone. Hedge funds raise money privately and cater to the super-wealthy: Getting into a fund has long required $1 million. Hedge fund managers argued that sophisticated investors didn't need the additional protection of securities laws.

Regulators started paying closer attention to the funds in 2003, when the number and impact of hedge funds increased. The SEC expressed interest in making the funds more transparent by requiring them to register with the agency. Most people in the industry opposed this; in fact, they were reluctant to turn over any information at all. However, their opinions weren't backed with much financial clout; in 2003 and 2004, the Managed Funds Association, the industry's largest trade group, spent just $142,000 on lobbying.

In December 2004, the SEC passed a rule requiring large U.S. hedge funds to register with the agency. The rule not only forced the funds to turn over basic information but allowed the agency to conduct audits. The experience taught hedge fund managers a lesson about the power of politics. They could ignore Washington, but Washington had no intention of ignoring them.

Senators Schumer and Hillary Clinton plus Mayor Bloomberg now face a quandary. Do they ignore the issue and continue to take the donations from this group of very rich individuals or do they follow the bloodlust of their most confiscatory party members... Votes vs Dollars... Which has the greater appeal? How to get both without sending the Fat Cats over to the Republican Side of the universe?

Senators Schumer and Clinton are on the fence over a bill that would force private equity firms and hedge funds to pay higher tax rates if they go public.

The bipartisan proposal, offered last week by the leaders of the Senate Finance Committee, could be prickly for the New York senators, who have pushed for increased fairness in the tax code while also advocating for growth in the financial sector, which has long been crucial to the state's economy. Opposition to the bill could also put them at odds with the dean of the state's congressional delegation, Rep. Charles Rangel of Harlem, who has publicly praised the proposal.

The proposals have drawn opposition from the top three declared Republican candidates for president. "I don't like raising taxes at all," Mayor Giuliani said yesterday in an appearance on CNBC, after being asked about Mr. Rubin's statement. He said booming Wall Street bonuses had contributed to surpluses for the city, and he pushed for lower taxes on capital gains as a way to encourage investment.
Aides to Senator McCain of Arizona and a former Massachusetts governor, Mitt Romney, have also indicated their opposition.

Asked about the issue yesterday during an appearance in California, Mayor Bloomberg did not take a position, saying policymakers should look back to the writing of the tax code to determine whether the intended public purpose of certain provisions is currently being served.

The Senate proposal is seen by some as targeting Mr. Schwarzman, whose lifestyle has been fodder for the press. At a dinner held in his honor last night at the New York Public Library, several of his high-powered friends stood by him. Martha Stewart called him a "very powerful and popular figure," while a vice chairman at J.P. Morgan Chase, James Lee, told The New York Sun that Mr. Schwarzman was "building the Wall Street of the future."

Into this fevered swamp the real estate and venture capital industries see themselves being dragged and may well be hurt by accident...

Senate Finance Committee staffers are looking into reclassifying the so-called “carried interest” that alternative-investment fund managers earn from capital income to ordinary income, effectively boosting their tax rates from 15 percent to as high as 35 percent.

he real estate and venture capital industries make heavy use of the same limited partnership structure used by such funds.

“They’re concerned with highly compensated hedge fund and private equity managers. Our concern is that changes would affect not only those managers but the smallest of real estate deals,” said Steve
Renna, counsel to the Real Estate Roundtable.

A spokeswoman for the National Venture Capital Association, Emily
Mendell, said it would be “ironic” and “terribly, terribly unfortunate” if venture capital were swept in under the change because of the role it plays in the economy

“It is difficult to justify a 15 percent tax rate for the performance of services in one set of circumstances — private equity, venture capital, hedge funds, high-dollar real estate — while at the same time a John Deere or Mary Kay salesperson who gets a bonus for performing their job well will be taxed at a higher rate of often 33 percent to 35 percent,” the aide told The Hill yesterday.

In a limited partnership, the general manager typically takes a 20 percent cut of the profits from the investment, called the “carried interest” or the “carry,” in addition to a fixed fee that usually amounts to two percent of the funds invested.

In theory, the carry is taxed at the lower rate for capital income because, unlike a salary, it is not guaranteed and often
isn’t paid in the year that the manager performs services to the partnership.

But critics argue that the treatment is a loophole that allows fund managers to escape taxation at the same ordinary income rates paid by other professionals.

...the lobbyists emphasize the importance of encouraging industries vital to the economy. In 2005, companies that received venture capital some time in the last 35 years accounted for 10 million U.S. jobs and $2.1 trillion in revenues, Mendell said.

Meanwhile, the quest for revenue due to the reinstatement of pay-go rule is also exacerbating the lobbyists’ concerns. “They’
ve got to get the money somewhere under pay-go rules. Anything being discussed you have to take extremely seriously,” Renna said.


Congress made the rule, it's not a law. Congress can break its own rules...and often does (Shall we discuss spending Ear Marks and 2006 election campaign promises contrasted with the recent rules changes ?)

The pay-go rule is a recipe for tax increases... It is supposed to limit the growth of government but the politicians cannot help themselves. Giving away other people's money is hard and important work. If they could not take from the middle and give to the rich and poor what would they do all year long?

Besides, Hunting Whales is fun. Playing Robin Hood is fun. Why else spend over a million dollars for a job that pays less than $200,000?

1 comment:

Anonymous said...

Actually I believe that this term was coined by a Californian during the 1960's. I cannot remember his name, but I know someone who does. I'll write back with his name, if your interested.