Obama and his coterie in the White House have finally submitted their initial draft of the American Jobs Act, though it doesn’t yet appear to have been formally introduced to Congress.
By any measure this is a late effort but, as usual for the Obama Regime, it’s not a better late than never situation – except possibly in the context of Obama keeping and his handlers keeping his own job for a few more years.
It’s largely (70% of it) the buying of votes and retreaded Liberal wealth redistribution ideas.
Simply put, it’s $447 billion of up front spending allocations to be supposedly paid for over the course of a decade by tax increases, including taxing the carried interest, or profits-based compensation, of private equity managers, real estate investors, and venture capitalists as ordinary income, instead of more lightly taxed capital gains.
This is not going to spur business or employment. It will likely have quite the opposite effect due to what Carried Interest is and how it works.
A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.
Traditionally, the amount of carried interest comes out to around 20-25% of the fund’s annual profit. While all funds tend to have a small management fee, the management fee is meant to only cover the costs of managing the fund, with the exception of compensating the fund manager.
Carried interest is meant to serve as the primary source of income for the general partner. However, the general partner must ensure that all the initial capital that the limited partners contribute is returned along with some previously agreed upon rate of return.
What happens is that people running the fund, called the General Partners charge the rest of the funds’ investors, the Limited Partners a combination of maintenance fees and profit sharing. This is usually referred to as “2/20,” signifying fees of 2% of the funds’ assets and 20% of the funds’ returns above an agreed upon amount known as the “hurdle rate.” That 20% is what is the Carried Interest, meaning the General Partners’ carried or ongoing financial involvement in the fund.
The 2% in fees is taken and taxed as income and the 20% is taxed upon “cash out” as capital gains with a maximum tax rate of 15% as opposed to the maximum of 37.9% for normal income. This latter part is what the Obama Regime and the Liberals and Progressive hate and want to fundamentally change.
Even more than the lower tax burden, it’s that the profits aren’t taxed until “cashed out” that chaps the Left the most. It is also why Obama’s plan to tax Carried Interest is a clear and present danger to America’s economy and proof that he cares nothing at all about any American’s economic future.
This is just another of Obama’s attacks upon America to feed the Left’s hunger to eat the rich.
It’s normal practice for the General Partners, like all wise business owners, to leave all or most of their profits – Carried Interest – in the funds. Therefor, if these profits are taxed as general income, they’ll have to be withdrawn from the funds which would reduce those funds’ available capital for investment by a like amount!
Less available investment and venture capital means less money for businesses to borrow for start up, renovation, or expansion and commensurately greater competition for that money as the venture capitalists are forced to move to a more conservative stance.
It also means lower absolute dollar returns – rate of return may stay the same – for the funds’ Limited Partners which include many personal retirement funds, pension plans, universities, and state governments. The effects of that are myriad and all negative.
The above is predicated upon Obama actually wanting this revenue. If Carried Interest will only be taxed as normal income when the General Partners cash out, this is not a problem.
It’s also, if that turns out to be the case, pure pandering bullshit that will generate little federal revenue and fail to do its part to pay for, however slowly, his “Jobs Plan.”
Fortunately for Americans, Obama is just, once again and again and again, shucking and jiving in the hope of not getting his worthless ass booted out of his new, temporary digs in DC come the 2012 elections. He knows that his American Jobs Act won’t pass muster in Congress as it is now and that the Carried Interest portion of it won’t be in the final version – if there even is a final version.
Keep your eyes open. Travel light but load heavy, and always put another round in the enemy after they’re down.
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