A Forbes editorial starts with it's normal zealotry:
Taxing carried interest as ordinary income is a really dumb idea.
Forbes Editorial on taxing Capital Gains as Ordinary Income
I was quite surprised that Forbes actually put up a piece with such an underwhelming argument. In fact it is so incredibly weak that it basically functions as an argument FOR raising taxes on specific capital gains.
Sort of like watching Sarah Palin explain some wacky foreign policy "idea", by the end of it the average voter is actually more opposed to her view.
Two reasons are given in opposition to taxing some capital gains as ordinary income. (Four if you count as a third argument a slippery slope argument but no need to waste anyone's time discussing a fallacy. The fourth argument would be that it "only" raises billions.)
So these better be two exceptionally strong points! Let's review them
1) Capital Gains are just different
You’ll often hear people saying that the twenty percent capital gains share allocated to the expert investor (the “carry”) is really more akin to labor income, and should be taxed as wages. Hogwash. It’s a capital gain, and wishing it was a wage does not make it so. The investor took money, bought an asset, grew the asset by making it more economically valuable, and sold the asset at a profit. In any rational universe, the resulting profit is a capital gain, plain and simple. It’s demagoguery and sophistry to argue otherwise.
He makes an argument that the capital gains are "more akin to labor income" and then replies that capital gains AREN'T labor income...therefor they can't be alike! It's basically a poorly constructed strawman fallacy.
Contractors, such as movie stars, use all sorts of ways to re-classify their income with benefits, profit sharing, merchandise rights, etc. We simply deal with them on a case by case basis to avoid egregious tax evasion. No reason the same rules shouldn't apply to every profession.
Hedge fund managers aren't using their own money, it's someone else. They are simply doing their job. Every profession has the ability to charge a flat rate, if that profession wants to insist on an alternative method of payment, it should subject itself to tax scrutiny to close any loopholes.
There's also a brief mention of double taxation and inflation. It's not some unjust "double taxation" anymore than if I were to complain I'm charged sales tax on a purchase I made with after-tax dollars...or I complain I'm using already taxed dollars to put into an unprotected retirement account and have to pay taxes on gains. Capital gains was already taxed anyway, this is just changing the rate.
On inflation, that is merely an argument to make the tax adjusted for inflation. Yes, if I invested $1000 something in 1980 and cashed out today at $2896.09, I actually gained no value. That $2896.09 has the exact same purchasing power as $1000 did in 1980. But we'd have to apply that to all assets that have gains. This is not an argument that is specific to hedge fund managers capital gains.
2) It will only hurt charities and pensions!
He believes investors will just charge a lot more:
Instead of getting twenty percent of the capital gain as your carry, [the hedge fund manager] might get thirty or thirty-five percent.
More money for [the hedge fund manager] means less money for the universities, charities, and pension plans. Instead of keeping eighty percent of the capital gains, they might be left with only seventy or sixty-five percent.
Good! This is a great argument FOR treating capital gains as ordinary income.
There are good programs that invest money: Pension plans for working class folk and some charities.
However, these plans are supposed to be stable and reliable, not get-rich-benefits-quick schemes relying on flashy investors actively managing your funds on a daily basis to try and maximize gains. That's how you get unrealistic growth plans or even loses.
I don't want to hear about how some pension fund manager got overwhelmed with some slick presentation and unrealistic projections and then the pension takes a giant hit and everyone throws their hand in the air. If active hedge fund managers are forced to charge outrageous fees, it'll make them less attractive to people who are SUPPOSED to be cautious.
That includes charities, even the good ones.
Note, charities are supposed to spend their money, not horde it. I know there are exceptions, but in those cases they can simply pick a safe and passive fund that would avoid lots of fees.
Now, there are also not-so-good programs that invest money: I'm looking at you Harvard and Yale. They have giant endowments and pretty much seem to take more pride on getting strong gains than anything else. Lot's of other "charitable" organizations are really designed for non-charitable things like naming fancy new empty buildings or sports facilities to "honor" donors. If hedge fund managers want to charge them outrageous fees, be my guest. Because when they do, we get to tax ALL that the hedge fund manager gets from those who aren't careful with their money.