By Richard Rubin
Here’s something Donald Trump and Hillary Clinton actually agree on: hedge funders pay almost nothing in taxes.
But that election-season refrain, from Republicans and Democrats alike, puzzles many tax experts.
Sure, hedge funds, like big corporations, use myriad maneuvers to legally reduce their tax bills. But the political line focuses on a single aspect of the U.S. tax code -- the treatment of carried interest -- that actually benefits financial players like private-equity investors far more.
“The hedge fund guys don’t give a fig about the carried interest legislation,” said Mark Leeds, a tax lawyer who does work for hedge funds at Mayer Brown in New York. “The public dialogue that hedge-fund managers are enjoying this benefit is so untrue that it sort of just defies the imagination.”
It’s easy to understand why politicians of all stripes keep talking about carried interest, which is the cut of client profits that managers get to keep. For many, hedge funds have come to symbolize the 1 percent era of Wall Street hyper-wealth, as well growing economic inequality.
Some hedge funds assuredly benefit from the carried interest break. The treatment gives huge advantage to investors who hold assets for at least a year by enabling them to pay the long-term capital gains rate of 23.8 percent instead of the 43.4 percent rate on short-term gains. But many hedge funds don’t fall into that category, particularly those employing hyperkinetic, computer-driven trading strategies that involve buying and selling securities thousands of times a day.