Trump, Clinton Lines on Hedge Fund Tax Payments Puzzle Experts


Republican presidential candidate Donald Trump speaks to the media before a campaign event on Sept. 23, 2015, in Columbia, South Carolina.

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.

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‘Very Disingenuous’

The debate irks some hedge-fund managers, who say the people who benefit most from carried interest are getting off easy in the political conversation.

“Those industries -- real estate, private equity and venture capital -- have been very clever but very disingenuous in letting the hedge fund industry take the fall for this and take the political heat,” said Whitney Tilson, managing partner of Kase Capital Management, an $80 million hedge fund based in New York.

Tilson, a Democratic donor, benefits from the break because he makes some longer-term investments, and he favors taxing carried interest as ordinary income.

“I shouldn’t get capital gains rates on the bonus that I get on your capital,” he said. “The people who benefit aren’t the one percenters. They’re the one basis pointers,” meaning the top 0.01 percent.

Since 2007

The private equity, venture capital and real estate industries have been publicly fighting against higher taxes on carried interest since 2007, when prominent Democrats, including then-Senator Barack Obama, raised the issue. At the time, the public villains were private-equity managers like Stephen Schwarzman of Blackstone Group LP, who had just thrown himself a lavish 60th birthday party.

It’s only recently that carried interest and hedge funds have gotten lumped together.

Trump, who last month accused hedge-fund managers of “getting away with murder,” called for eliminating the carried-interest break in the tax plan he released on Monday. The billionaire front-runner for the Republican presidential nomination would also reduce the top income tax bracket on the wealthiest Americans to 25 percent from 39.6 percent, effectively minimizing the change that the real estate celebrity has spent months promoting.

Clinton, who’s seeking the Democratic nomination for 2016, said at an event in May that, “There’s something wrong when hedge-fund managers pay less in taxes than nurses.”

Little Data

The Managed Funds Association, which represents hedge funds, declined to comment.

There aren’t reliable data on tax rates paid by hedge-fund managers, private-equity managers and real-estate investors. And the distinctions among types of fund managers can be somewhat fluid.

But many hedge funds don’t get the benefit of the long-term capital gains rates.

“Hedge-fund managers, relatively speaking, pay a good deal of tax, because it tends to be short-term capital gain,” said David Miller, a tax lawyer at Cadwalader, Wickersham and Taft in New York who specializes in the taxation of private equity and hedge funds.

If top hedge-fund managers benefited so much from carried interest, the official revenue estimate from congressional scorekeepers would probably be much bigger. The Joint Committee on Taxation, which has access to tax returns for its estimates, recently pegged the potential revenue gain from a bill that would end the benefit at $15.6 billion over 10 years.

‘Big Number’

“That’s a big number, but in the scope of things, not that big a number,” Miller said.

What’s more, if carried interest worked so well for hedge funds they probably wouldn’t be employing so many other crafty maneuvers to avoid taxes at short-term capital gains rates.

Renaissance Technologies, for instance, came under congressional scrutiny last year for its past use of basket options, which enabled the firm to say that it was realizing long-term gains even though it was making short-term trades.

Other hedge funds, including those run by John Paulson and David Einhorn, have been creating reinsurance companies in Bermuda, in part so their investments can generate long-term capital gains when sold. Representatives for both declined to comment.

James Simons, the founder of Renaissance and a major Democratic donor, told a House panel in 2008 that he wouldn’t care if the carried interest break went away.

“The carried interest portion represented by other people’s money -- if that were raised to higher levels, that would be OK with me,” he said

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