Funny how issues arise in Washington and become all-consuming for their designated 15 minutes. Right now, it's hedge fund managers, along with the Blackstone deal that somehow cleverly avoids corporate status under federal income tax law for what is effectively a publicly traded firm. (I'm not up to speed at this point on just how they manage this.)
Back on the hedge fund point, which I blogged on recently, I got an invitation from wsj.com to participate in an on-line two-person blog forum this week discussing the merits of the proposed legislation that would get rid of the managers' ability to take most of their compensation at a 15% marginal rate. They said I could blog pro or con, and the whole thing would be wrapped up within a few days. Tempting, and I definitely would have liked to do it (I would have blogged pro the legislation) so long as the opposing debater was a responsible grown-up not a Norquistian freak.
But I had to pass as I will be on the road, flying to Singapore to teach Tax Policy at the NYU @ National University of Singapore program, at the time when the exchange is supposed to take place.
One point I would have made is that, under a properly designed consumption tax, the hedge fund managers would definitely be taxable at the full statutory rate, whether directly or indirectly. Say it's a consumed income tax with yield-exempt savings accounts allowed only for "arm's length," i.e., third party market transactions. The managers would have to expense, and would pay a positive tax, upon consumption, on their more than market interest rate of return (assuming they're good enough to add value through their labor). A properly designed X-tax or flat tax would likewise avoid providing the benefit of the low rate, although exactly how this would work out as a practical matter, in light of these rules' generally disregarding financial instruments and eliminating double taxation of corporate equity-financed income, would take a bit more figuring out than I have time for pre-trip. E.g., we might have to think of it as operating via the corporate-level tax on the underlying equities. But clearly a 15% tax rate on substantially positive real returns that conceptually are labor income would not be the fruit of any well-designed and properly operating progressive consumption tax.
I am starting to think this issue requires a bit more thought than I have time for right now. But that's the great thing about blogging as opposed to scholarship and even journalism - tentative first drafts are allowed, as I see it.