Given the choice between reading an article on federal tax policy toward private investment fund partnerships and shooting yourself, which would you choose?
Many of us would have to think twice about that choice, and that’s why the billionaires who run America’s hedge and private equity funds are winning their war to save what may be the single most outrageous loophole in the U.S. federal tax code.
In this week’s Too Much, we chronicle the latest skirmish in that war. But before you read on, we invite you to take a look at a delightful new video — from director Robert Greenwald — that just may leave you yearning to learn lots more about investment fund tax policy.
Greenwald’s new War on Greed, Starring the Homes of Henry Kravis — “think Lifestyles of the Rich and Famous meets Roger & Me,” says one reviewer — comes complete with a nifty reading list that notes last week’s Too Much feature on Wall Street, Burger King, and Florida’s migrant tomato pickers.
About that feature: A computer glitch kept some Too Much readers from receiving last week’s issue. If you’re in that boat, just check our back-issue archive here.
Regular mortals who fly on commercial airlines can always find a seat-pocket airline magazine. But what about the super-rich who fly in private jets? What do they get to read? They get Elite Traveler, the onboard magazine for the global private jet crowd. Elite Traveler knows that crowd as well as anyone — and even publishes an annual super-rich holiday spending survey. For this year’s survey, Elite Traveler polled 270 affluents worth at least $10 million each. On average, says the magazine, these high-flyers will spend $31,100 this holiday season on wine and liquor, $86,200 on villa rentals, and $39,300 on electronics. The super-rich also plan to contribute an average $116,300 to charity over the holidays, almost as much as the $152,400 they plan to spend on jewelry. This jewelry category doesn’t cover watches. Elite Traveler’s super-rich readers will spend another $66,700 to help their loved ones keep track of time, the one thing money can’t buy . . .
The ongoing subprime mortgage crisis may be squeezing American families, by the hundreds of thousands, out of the homes. But that hasn’t stopped the CEO retired from one bank at the heart of that crisis from moving into the most expensive home — by square-foot price — in U.S. history. Sandy Weill stepped down as Citigroup CEO in 2003, but stayed on as chairman into last year. The bank is now in the process of writing off $15 billion in mortgage debt gone sour, and Weill is now in the process of putting the finishing touches on his recently purchased $42.4 million penthouse overlooking New York’s Central Park. The new digs set Weill back $6,287 per interior square foot . . .
Three of 10 most expensive American homes sold so far in 2007, Forbes reported last month, sit in California. The state’s nonpartisan Legislative Analyst’s Office has just released, coincidentally, a new study on how much California’s mortgage interest deduction — as currently structured — saves the state’s affluent. In 2004, the report reveals, the state’s top 1 percent of income-earners realized $201 million in mortgage interest deduction tax savings. The bottom 60 percent of California taxpaying households, all combined, realized $148 million in savings . . .
Behind every successful corporate CEO stands . . . a corporate CEO pay consultant with a conflict of interest. The top watchdog committee in Congress last week released data that dramatically expose how CEOs are using pay consultants to rig the pay-setting process to their favor — and fortune. Most companies currently hire consulting firms to “help them decide” how much to pay their CEOs. But CEOs, in turn, frequently hire these same firms to provide other services that can be far more lucrative to the consultants. In 2006, notes the House Oversight and Government Reform panel, at least 113 of America’s top 250 companies had CEO pay consultants “receiving millions of dollars from the corporate executives” they were hired to assess. CEO paychecks at companies with deeply conflicted pay consultants last year ran 67 percent higher than CEO paychecks at companies “that did not use conflicted consultants.”
The Institute for the Preservation of Dynastic Wealth may soon have to admit defeat in its latest effort to help repeal the federal estate tax. The Institute, the think tank of that comedic collection of heirs and heiresses known as Billionaires for Bush, last month announced a national search for a real-life family farm lost to the estate tax, the only U.S. levy on grand concentrations of private wealth. Lawmakers like Senator Jon Kyl from Arizona like to claim that the estate tax is killing family farming, but they’ve never produced a single actual family farm casualty. And the Institute hasn’t found one yet either, despite offering any true casualty a gift bag with products from the ultra-rich families bankrolling the estate tax repeal campaign. Among the gift bag goodies: a jug of Gallo wine and something "kind of nice, but plastic" from the Wal-Mart heirs. In 2009, notes the Center for Budget and Policy Priorities, only 65 farms nationwide will face any estate tax at all.
Quote of the Week
“An estate tax targeted at the wealthiest families puts a necessary break on what would otherwise be a natural flow of money into fewer and fewer hands, a flow that would eventually destroy America as a land of innovative entrepreneurs and turn it into what investor Warren Buffett described to the Senate Finance Committee recently as 'a dynastic plutocracy.'”
Buffalo News editorial, Restore Estate Tax, December 7, 2007
New Wisdom
on Wealth
Prem Sikka, The wealth of the nation, Guardian, December 5, 2007. A corporate governance expert at the University of Essex argues that only major changes in the political system can stem rising inequality.
Cliff Schecter, Why We Need A War On Greed. December 7, 2007.
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.
Now 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.
“There's been a gigantic effort on the part of Wall Street to lobby this issue,” Senator Charles Grassley from Iowa told the Washington Post last week. “They've hired every Tom, Dick and Harry, and they've put on every former Grassley staffer they could. It has had an impact.”
That impact will ensure hedge and private equity fund managers like John Paulson still another year of windfall tax breaks. But those tax savings, at least in Paulson’s case, may end up having some redeeming social value.
Paulson has earmarked $15 million of his investment fund earnings for a nonprofit that’s helping victims of the subprime mortgage collapse. That’s eminently thoughtful of him. Paulson, after all, owes most of his 2007 success to investment bets he placed on the subprime mortgage market.
On the other hand, this $15 million donation by Paulson — who lives in a five-story, $14.7-million townhouse on Manhattan’s East Side — equals just over half of 1 percent of what Paulson & Co. has cleared this year in hedge fund performance fees.
Let’s hope he tips better.
Paul Krugman, The Conscience of a Liberal.
W. W. Norton & Co. 296 pp.
Economist Paul Krugman, the New York Times op-ed columnist, has written a history book — and a fine one indeed. But a flawed one, too.
The Conscience of a Liberal, by lucidly linking inequality and the insecurity of average working families, reminds us once again why Krugman has emerged as America’s most compelling mainstream media voice for a significantly less top-heavy national distribution of income and wealth.
His theme remains consistent: The more unequal we have become as a nation, the more income and wealth have concentrated, the more difficult daily life has become for low- and middle-income Americans.
Conscience of a Liberal aims to explain why we have become more unequal, and, in this always readable effort, Krugman does explain far more than he can within the limited confines of an op-ed column. He does a masterful job tracing just how “movement conservatives” have seized the Republican Party and fashioned a politics that has gnawed away at America’s equalizing “institutions and norms.”
But that’s not the whole story. Movement conservatives — from William Buckley to Karl Rove — have certainly motored the drive to make America safe for plutocracy. But they have had help, at nearly every critical juncture, from leaders and lawmakers that liberals have elected.
Contemporary liberals, to achieve and maintain a clear conscience, need to come to grips with this aid and abetting. Krugman, in Conscience of a Liberal, never does.
We have more, in the full Too Much review.
Stat of the Week
Exxon Mobil, thanks to rising world oil prices, is now pulling in profits at a $100 million-per-day rate. Exxon CEO Rex Tillerson, thanks to the Exxon board of directors compensation committee, will now pocket nearly $20 million in bonus and stock awards, on top of a 25 percent salary hike. Tillerson and his fellow Exxon top execs, the company announced last week, will be sharing in a $214 million bonus pool.
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.
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