In the Two Minute Drill, we explain complex issues in politics in 250 words or less (roughly the amount of words it takes the average adult two minutes to read on a monitor). Politics just isn’t always that complicated. Without the fluff and partisan bias, even the most complex of our political differences can be explained succinctly. This week: taking a look at the carried interest loophole. This is The Two Minute Drill for Friday, March 28, 2014.
President Obama’s fiscal year 2015 budget proposes to eliminate what Business Insider calls “Wall Street’s favorite tax loophole”: carried interest. Debate over the loophole played a prominent role in the 2012 presidential election (it was, as Mother Jones termed it, “Mitt Romney’s favorite tax break”), and Obama has unsuccessfully tried to close the loophole in prior budgets. But what is the loophole, and why do Democrats think repealing it is important?
The Explanation (250 or Bust)
There are two kinds of partners in private equity firms or hedge funds: (1) the fund managers, who guide the investment strategy, are “general partners”; (2) outside investors, who contribute capital but have no say in investment or management decisions, are “limited partners.” When the funds’ investment yield a positive return, both general and limited partners receive income. In addition, however, the general partners receive compensation from the limited partners.
In most funds, the standard pay formula is called “2 and 20”; that is, the fund managers take 2% of the fund’s assets each year as a management fee, and 20% as a kind of performance bonus. The management fee is often paid in cash and is taxed at ordinary income rates. But the performance bonus is typically credited to the manager’s account and is often carried over from year to year until a cash payment is made, usually following the closing out of an investment. Thus it is called “carried interest.” The carried interest is then taxed at the capital gains rate (20%) which is below the top ordinary income tax rate (39.6%).
The debate over carried interest, therefore, is actually irrelevant. The only issue that really matters is how we tax capital gains.
The lower taxes on capital gains are often justified on the grounds that they encourage investment. But that assertion is debatable. At the end of the day, capital gains permits the highest earners to pay paltry taxes (in terms of their tax rate).
Word Count: 248
The Five Most Interesting Things We’ve Read This Week
Here are the five most interesting articles (both political and non-political) we’ve read this week:
- “By the time they reach high school, nearly 20 percent of all American boys will be diagnosed with ADHD . . . The shocking truth is that many of those diagnoses are wrong, and that most of those boys are being drugged for no good reason — simply for being boys.” Is it simply that we are better at diagnosing and treating? Or are we overdoing both? From Esquire: The Drugging of the American Boy.
- “So my prediction is that we’re going to ingest information. You’re going to swallow a pill and know English. You’re going to swallow a pill and know Shakespeare. The way to do it is through the bloodstream; once it’s in your bloodstream, it basically goes through and gets into the brain and when it knows it’s in the brain it deposits the information in the right places . . . This isn’t far-fetched.” That’s Nicholas Negroponte, founder of MIT Media Lab, on his prediction for the future. Maybe it is a little far-fetched, but it’s interesting nonetheless. TED Blog put together a list of TED presenters sharing what they think might radically change our lives in the future: What Will Blow Our Minds in the Next 30 Years?
- “Tiny amounts, whether ingested or absorbed through the skin, can cause vomiting and seizures and even be lethal. A teaspoon of even highly diluted e-liquid can kill a small child. From The New York Times: Selling a Poison by the Barrel: Liquid Nicotine for E-Cigarettes.
- “Behind the door, a room opens up as big as a supermarket, full of five-drawer file cabinets and people in business casual. About 230 feet below the surface, there is easy-listening music playing at somebody’s desk. This is one of the weirdest workplaces in the U.S. government – both for where it is and for what it does.” An inside look at the Office of Personnel Management. From The Washington Post: Sinkhole of Bureaucracy: Deep Underground, Federal Employees Process Paperwork by Hand in a Long-Outdated, Inefficient System.
- “We think first of vague words that are synonyms for progress and pair them with footage of a high-speed train . . . Our profits are awe-inspiring. Like this guy who’s looking up and pointing at a skyscraper or a kite, while smiling and explaining something to his child.” A piece by Kendra Eash: This Is a Generic Brand Video. While the original is good, Eash’s piece in video form is even better. Watch it below.
And in case you missed it, check out The Weekly Column. This past week took a look at alternative medicine, and in particular chiropractic, under the Affordable Care Act. Read the Column – Alternative Medicine and Insurance Non-Discrimination under the Affordable Care Act.