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Rubin Suggests US Fund Managers Paying Too Little Tax

by Leroy Baker, Tax-News.com, New York

14 June 2007


A former United States Treasury Secretary has suggested that fund managers receiving pay through performance fees are not paying their fair share of tax, adding fuel to the debate as to whether curbs should be placed the escalating sums earned by the top fund managers.

Sitting as a panelist at a tax reform conference organised by the Hamilton Project, part of the Brookings Institution, Robert E. Rubin, a Treasury Secretary during the Clinton administration, was asked whether it would be more appropriate for fund managers earning profits from managing others' money, known as carried interest, to pay income tax at rates of up to 35%, instead of capital gains tax, which can be taxed at 15%.

“It seems to me what is happening is people are performing a service, managing peoples’ money in a private equity form, and fees for that service would ordinarily be thought of as ordinary income,” Rubin said. He went on to state that the issue should be examined “with great seriousness” by the Congressional tax committees.

Currently, the standard basic fee structure for managers of hedge and private equity funds is 20% of gains made by the fund, plus a 2% management fee. This has helped to fuel some massive pay increases for the heads of the most successful funds. According to Alpha magazine, the average pay of the 25 top performing fund managers was $570 million last year. The highest paid of these fund managers was James Simons, chairman of Renaissance Technologies, who earned $1.7 billion.

Senate Finance Committee Chairman Max Baucus (D - Mon) has expressed concern that hedge fund and private equity fund managers are manipulating the US tax code to reduce their tax bills, but he has revealed that new legislation to rectify this is a long way off. Speaking at a recent National Press Club meeting in Washington D.C., Baucus said that Senate tax writers were "nowhere close" to drafting new legislation to ensure that hedge funds and buy-out firms pay what he considers to be an appropriate amount of tax on their income.

"I'm not close to having legislation, not yet, but I may," he stated. "My view is, first I want the facts. I want to know what's going on here."

Senate Finance Committee staff are currently examining this area of taxation after a closed-door hearing heard from a number of experts on the subject last month, including University of Colorado law professor Victor Fleischer, who has written a study of the tax implications of hedge-fund managers' pay, and Internal Revenue Service officials.

"The different rate between capital gains and ordinary income puts a lot of strain on the code," Baucus explained.

The two-part Hamilton Project forum was convened to address the challenges of reforming the US tax system in an increasingly global economy. It was opened by former US Treasury Secretary Lawrence H. Summers and featured contributions from academics and Congressional staff.

A comprehensive report in our Intelligence Report series examining Expatriate Taxation and Reward Structures is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report10.asp

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