In a tweet on Thursday, US president Joe Biden reiterated that a teacher shouldn’t be paying a higher tax rate than a hedge fund manager.
The tweet comes after the US President addressed the nation at the White House, to gather support for his new $3.5 trillion budget package to boost the economy where the top 1% will have to pay more taxes. He repeatedly said that billionaires and corporations should “pay their fair share” in taxes, adding that “ordinary hard-working Americans” have basically “been cut out of the deal.”
On average, a hedge fund manager pays between 20% – 23% overall tax, while a teacher could pay up to 37% tax. There are also several ways in which hedge fund managers could reduce this even further.
Investopedia states that Carried interest is a share of any profits that the general partners of private equity and hedge funds receive as compensation regardless of whether they contribute any initial funds. Because carried interest acts as a type of performance fee, it motivates the fund’s overall performance. However, carried interest is often only paid if the fund’s returns meet a certain threshold.
Many hedge funds take advantage of the ‘Carried Interest’ structure as the fund will be treated as a partnership. Hedge fund managers are compensated with this carried interest. The income they receive from the fund is taxed as a return on investment as opposed to a salary or compensation for services rendered – So the tax they pay is significantly less than what others tend to pay.
This is not something new; former US president Barack Obama also took a dig at hedge fund managers, calling them Lottery winners, when he tried and failed to raise taxes for hedge fund managers.
“If we can’t ask from society’s lottery winners to just make that modest investment, then really, this conversation is for show,” Mr. Obama said. He added later, “If we can’t bridge that gap, I suspect we are not going to make as much progress as we need to.”Barack Obama, Georgetown conference, Feb 2015
In 2019 it was estimated that the annual loss for the Treasury just from Carried Interest is about $15 billion a year. When you add loopholes and other schemes, the amount tops at least $25 billion a year.
Gary Gensler targets hedge funds
In a recent interview with CNBC, Gary Gensler took a stand and defended the actions of Redditors. When asked if their actions were OK and not market manipulation, the SEC Chair said, “If three hedge fund members work in concert to smash a short hedge fund, the 5 million Reddit people would say that’s legal, but perhaps it shouldn’t be,” “If 5 million people decide to smash a hedge fund that’s short, is that OK? What’s within the bounds of what you can do to smash a short seller?”
This interview comes after the Senate Hearing where Gary Gensler testified that he’s focusing on Crypto trading platforms and the Payment for Order Flow scheme.
He also told the Senate Banking Committee that he’s concerned about Citadel Securities, which holds almost 47% market share of overall retail volume, followed by Virtu Financial, holding nearly 30%.
“I’m pro competition, and I’m not sure the payment for order flow system really is the best competitive landscape,” Gensler said.
When a wholesaler like Citadel Securities find a stock at a lower price than the investor, the difference is split between the brokerage and themselves. The cost savings is then passed on to the investor in the form of a better price. This is a major reason why many brokerages can offer zero-commission trades.