A Victory for a Sick Tax Loophole.

Hedge fund speculators are making billions by the bushel. But, come politics time, the managers of these funds know better than to gamble. Just ask anyone who sits in the United States Senate.

December 10, 2007

By Sam Pizzigati

Congratulations, John Paulson! Bloomberg News, after combing through the records of 2,000 hedge funds with at least $100 million each in assets, has just named you 2007’s top-earning private investment fund manager, through this year’s first nine months.

Paulson’s Paulson & Co. family of hedge funds, says Bloomberg, has pulled in $2.69 billion in performance fees so far this year.

2005 top incomesNow here’s the best part — for Paulson and Paolo Pellegrini, his co-manager at Paulson & Co. All those fee billions will get taxed, come April 15, at just a 15 percent rate, not the 35 percent rate that applies to ordinary high income.

How’s that possible? Simple. The U.S. tax code currently sports a clever little loophole that lets hedge and private equity fund kingpins define their “performance” pay as a capital gain.

In 2007, this loophole will save masters of the universe at Paulson & Co. $538 million — over half a billion dollars — off their taxes.

Paulson and Pellegrini won’t be the only private investment fund superstars benefiting big-time from what’s usually called the “carried interest” loophole. Philip Falcone of Harbinger Capital Partners and Jim Simons of Renaissance Technologies LLC have each collected over $1 billion in incentive fees so far this year.

Billionaires like these, investor guru Warren Buffett observed last month, will all pay federal taxes on their 2007 earnings at a lower tax rate than their receptionists.

Now here’s the amazing part: The Senate of the United States does not care.

Last month, the House of Representatives passed legislation that ends the “carried interest” loophole and uses the proceeds from that move to help fund tax relief for middle-class taxpayers.

Last week, Senate majority leader Harry Reid could not round up enough votes to stop a GOP filibuster to kill the House bill. That legislation now has no chance of passing the Senate this year.

The main reason: The private investment fund industry has mounted an unprecedented lobbying blitz against ending the “carried interest” loophole.

Private investment funds, says the Center for Responsible Politics, spent only $3.7 million on lobbying in all of 2006. They spent $8 million in the first six months of this year alone — and also upped their political contributions to federal candidates and party committees from $1.6 million in 2005 and 2006 combined to $11.7 million in this year’s first nine months.

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