Friday, September 07, 2007

Annals of Excessive Compensation: Pension Funds Throw the Greenwich Ferrari Dealer Under the Bus

by Tom Bozzo

Yesterday's NYT included a refreshing moment of sanity as Stephen Labaton and Jenny Anderson (I've praised Ms. Anderson's work in an earlier installment of this series) report on Senate hearings on the tax treatment of "carried interest." The lede:
Pension fund and tax specialists told Congress today that a proposal to more than double the tax rate of executives at private equity firms and hedge funds, which invest money from pension funds, would have a negligible effect on the returns provided to pensioners.
I could pick a nit or two with the "more than double the tax rate" wording. It would not have decreased the accuracy of the statement to have said "proposal to close a tax loophole used by executives at private equity firms and hedge funds to pay less than half the tax rate on ordinary income." But that's about all the beating of the press here. [/Dean Baker] The rest of the piece is an unrelenting demolition of the funds' rather incredible claims that the special tax treatment of the managers' income benefits Joe and Jane Six-Pack and preserves the Entrepreneurial Spirit of America. Read the whole thing.

Here's an interesting quote from Sen. Max Baucus:

“The data says to me that hedge funds and private equity funds may need pension funds more than pension funds need private equity or hedge funds,” Mr. Baucus said. “And that means that hedge funds and private equity funds may not have the economic power simply to pass along increased costs to pension funds.”

To the first part, I can only say "no kidding" or "heh indeedy." On the second, Baucus's causal link may be questionable, but if he's otherwise right, it would be good for Econ 101 economics, which otherwise would have some 'splainin' to do as to how the 2-and-20 fee structure could withstand such massive entry.

Oh, and the hedge fund managers' incomes could be taxed at Clinton-era marginal rates for ordinary income without hurting the Ferrari dealers any more than the pension funds, really.

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