The Tax Break for Hedge Fund Managers

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By Jackie Stein

As I spoke to people all over the country this summer about their federal budget priorities, many people told me about tax breaks that either irked them or helped them. Lots of Americans seem to feel that tax breaks and tax loopholes make the tax code unfair, but at the same time, many people depend on those breaks. NPP has just released a new database on tax breaks and so we thought we’d share some stories from the Faces of the Budget project to go with the numbers.

Tax Break on Capital Gains and Dividends

John from New Mexico used to pay the top tax rate on his income until he retired. He was frustrated with a rule associated with the tax break for capital gains and dividends. The "carried interest rule" allows certain people, such as hedge fund managers, who earn money by investing other people’s money to pay a lower tax rate than many people who earn a living from wages. That's because hedge fund managers can classify some of their income as "capital gains," or investment income, which means that even though they might be earning millions of dollars, they pay a special low tax rate rather than the higher tax rate that applies to wage income.

The people who benefit most from this rule are some of the highest income earners in the country, and John thought this was unfair. The money he earned was taxed at the top tax rate of 35 percent, while "hedge fund manager[s] on Wall Street," who make money using "billions of other people’s dollars in order to generate income for [themselves]" only paid a tax rate of 15 percent.

This year the tax break for capital gains and dividend income is estimated to reduce tax revenue to the federal government by $83 billion, according to the new dataset just released by NPP.  Sixty-eight percent of those tax savings will go to the top 1 percent of income earners (those making $462,500 and above for a two-person household). Check out this interactive visualization for more info.

Tell Your Story

These tax breaks affect all of us in direct and indirect ways. What do you think about them? Do you have a story about how tax breaks or other federal programs and policies affect your life? Share your story on our Faces of the Federal Budget page and weigh in on this important debate – especially as Congress prepares to take up tax reform.

Jackie Stein is a PhD candidate in sociology at the University of Massachusetts and an intern at National Priorities Project.