Deficit Reduction Discussion

July 10, 2011

The Walrus has tried to stay on the sidelines on this stuff, thinking that reason and common sense would prevail.

Late on Saturday, July 9, House Speaker John Boehner said that he had given up on the potential for a bi-partisan effort to reach a rational $4 Trillion deficit-reduction plan tied to a proposal to increase the federal debt limit.

The major impediment seems to be an unwillingness among Boehner’s fellow Republicans who seem determined to oppose any package containing proposals that could be construed as a tax increase.

I happen to be a member of that small group of people who rely almost entirely on earned income, and fall into the Alternative Minimum Income (“AMT”) calculation for federal income tax purposes.

My sense is that any ‘tax increases’ contemplated in the proposed deficit reduction legislation would actually result in tax relief for me and my family.

I’m thinking that in a reformed income tax strategy, some of the Hedge Fund guys will no longer be able to claim that their income should be taxed as capital gains – at a 15% rate.

Hedge Fund Managers make their money by charging their clients two fees. The first fee is a “management fee”, frequently two percent of the assets under their management. The second fee is a “performance fee”, typically twenty percent of the income from those assets above a threshold level.

This 20 percent share of the investment returns from hedge funds is known as “carried interest” and under current tax law, hedge fund managers are allowed to claim carried interest as a long-term capital gain, currently subject to a maximum tax rate of 15 percent, rather than being taxed as ordinary income, currently subject to a maximum federal tax rate of 35 percent.

My reaction: That’s a racket.

These folks are often betting to crash the U.S. economy and take the rest of us down, and when they win, they pay taxes at 15%, where the rest of us are getting raped and pillaged at 35% or more.

If they only understood what is really going on, the TEA Party folks would have a valid reason to be pissed off…..

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