Under the tax code, wages are taxed as ordinary income. Moderate income workers typcially get taxed at a 10-15 percent marginal rate. More middle class workers, like school teachers, firefighters, and truck drivers, typically face a 25 percent marginal tax rate on their wages. Higher income professionals like doctors and lawyers will typically pay a 35 percent marginal tax rate on their income. In general, the tax rate is determined by income, not occupation. A truck driver and a librarian owe the same tax, if their income is the same. Of course things are different if you manage a hedge fund. Under current law, hedge fund managers are allowed to treat their compensation as capital gains. This allows them to pay just the 15 percent tax rate on capital gains. Furthermore, unlike the ordinary schmucks who get their taxes deducted directly from their paychecks, they get to defer the tax until they actually sell off their interest in the fund. There are several bills now before Congress that would tax fund managers like other workers. There doesn't really seem to be much of an argument on the merits of this one. The fund managers say that they are risk takers and the government shouldn't stifle their activities. Of course, firefighters, police officers, and poultry workers are also risk takers, no one says that this means that they shouldn't pay taxes. Wages are supposed to compensate for risk taking. In the case of fund managers, who often earn more than $100 million a year, it seems like they are being adequately compensated already for whatever risk they incurr. While the fund managers may not have much of an argument, they do have lots of money, which they have lavished on politicians of both parties. As a result, the prospect of bills changing this provision of the tax code is uncertain. The NYT did its part for the fund managers when it described one of the bills as raising the taxes on the "investment gains" of fund managers. This is not true. There is no question that the gains on any money that fund managers invest themselves in the funds will be taxed at the capital gains rate of 15 percent. The issue is how the compensation that they earn from managing the fund will be taxed. This is a very simple issue. The media should not obscure it for the public.
--Dean Baker
