Should WS Execs Get Capital Gains Tax Rate?

This WaPo article about "a special low tax rate on [Wall Street] executives' salaries" triggers a flashback to 1990's Bonfire of the Vanities. (tip)

Private-equity fund managers earn much of their compensation by taking a cut of clients' earnings. It is pay for work, but critics of the arrangement note that it is taxed as capital gains, at 15 percent instead of the 35 percent income tax rate that they would otherwise pay... Viva Hammer, who recently left the Treasury Department's Office of Tax Policy ... said that about half of all private-equity compensation is taxed that way. About 20 percent of hedge fund compensation also is taxed at 15 percent, a rate lower than the one most secretaries pay.

What is it that feels like 1990? I clearly see the scene where Sherman McCoy's wife explains "Daddy's" job:

Darling, Daddy doesn't build roads or hospitals or anything, really. Daddy just handles the bonds for the people who raise the money.

[...]

See, just imagine that a bond is a slice of cake. Now you didn't bake that cake, but every time you hand somebody a slice of that cake, a little bit comes off, little crumbs fall off. And you're allowed to keep those crumbs.

[...]

He passes somebody else's cake around and picks up the crumbs. But you have to imagine a lot of crumbs. And a great golden cake. And a lot of golden crumbs. And you have to imagine Daddy running around picking up every little golden crumb he can get his hands on. That's what Daddy does.

So not only do these guys make exorbitant salaries based on a legalized form of sticky fingers, they are also fleecing the Treasury. Because of a "loophole." (To anyone who thinks the loophole was an accident: I have a bridge for sale ...)

Legal Payola
The former chairman of President Bush's Council of Economic Advisers believes this "should be taxed as ordinary income, not long-term capital gain." (tip)

Of course, when the Democrats start looking at ways to close this loophole, Wall Street execs simply pull out the checkbook. For example, this summer Steven A. Cohen of SAC Capital Advisors and James H. Simons ("who earned $1.7 billion last year at his Renaissance Technologies LLC") each wrote a check for $28,500, payable to the Democratic Senatorial Campaign Committee (DSCC).

Shortly afterwards, DSCC Chair Sen. Charles E. Schumer (D-NY) decided that the loophole doesn't need closing. That loophole, plus another that "[shifts] compensation to offshore tax havens and defer tax payments on that money for years," would result in about $50 billion in revenue over the next 10 years. That income projection helps pay for the revenue shortfall that would result from an inflation-adjusted increase in the floor for the Alternative Minimum [Income] Tax (AMT).

Between 65 and 79 percent of hedge fund contributions since 2004 have gone to Democrats.

If this WaPo bill analysis is accurate, and it sure looks like it is, I say "Bah. A pox on Schumer (and his compatriot's) houses."

What's In The Bill?
Par for the course, the bill is over-reaching.

In addition to closing these two loopholes, the bill would adjust the AMT -- 60s era legislation intended to prevent "the rich" from avoiding income tax through creative deductions -- so that middle class Americans aren't pushed into the "rich" category through inflation. It would also "provide tax relief for homeowners reworking their mortgages and extend 38 expiring tax breaks."

Are you a taxpayer who has been "inflated" into the AMT bracket? From Tax Policy Center: "Ways and Means Committee Chairman Charles Rangel has proposed raising the 2007 AMT exemption from $45,000 to $66,250 for couples and from $33,750 to $44,350 for singles."

The US Census reports that the average income for a single person household in 2006 was $36,308 and for a two-person household, $68,660.

The House has postponed Friday's scheduled vote. The White House threatens a veto.

HR 3996, The Temporary Tax Relief Act of 2007; CRS Summary; Congressional Action.