Friday, October 26, 2007

Hedge Funds, Tax Rates, Income Inequality and Cap-and-Auction

Robert Reich, writing at Salon:

...The biggest emerging pay gap is actually within the top 1 percent of all earners. It's mainly a gap between corporate CEOs, on the one hand, and Wall Street financiers -- hedge-fund managers, private-equity managers (think Mitt Romney) and investment bankers -- on the other. According to a study by University of Chicago professors Steven Kaplan and Joshua Rauh, more than twice as many Wall Street financiers are in the top half of 1 percent of earners as are CEOs. The 25 highest-paid hedge-fund managers are earning more than the CEOs of the largest 500 companies in the Standard and Poor's 500 combined. While CEO pay is outrageous, hedge-fund and private-equity pay is way beyond outrageous. Several of these fund managers are taking home more than a billion dollars a year.

At the very least, you might think that Democrats would do something about the anomaly in the tax code that treats the earnings of private-equity and hedge-fund managers as capital gains rather than ordinary income, and thereby taxes them at 15 percent -- lower than the tax rate faced by many middle-class Americans. But Senate Democrats recently backed off a proposal to do just that. Why? It turns out that Democrats are getting more campaign contributions these days from hedge-fund and private-equity partners than Republicans are getting. In the run-up to the 2006 election, donations from hedge-fund employees were running better than 2-to-1 Democratic. The party doesn't want to bite the hands that feed....MORE

Robert Reich, a professor of public policy at the University of California at Berkeley, was secretary of labor during the Clinton administration. He is also a blogger and the author of "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life."

He's also one of the people who advocate Cap-and-Auction.