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Job creators vs. speculators vs. money managers

If anyone noticed my absence for the past week, I took a break in an undisclosed (but warm) location. And, if I don’t run into you before Sunday, Happy Mother’s Day.

Haven’t had time to start anything ambitious, but I’ll just pass along Paul Krugman’s column of today, in which he discusses the 25 highest paid hedge-fund manager of last year, who earned a combined total of $21 billion, or, as Krugman notes, more than twice as much as the combined income of all the kindergarten teachers in America.

Highlighting the fortunes of these billionaires isn’t — as righty critics like to assume — about class envy, Krugman argues. In fact, it’s about looking square in the face of the myth that righty critics prefer, “that the big rewards in modern America go to innovators and entrepreneurs, people who build businesses” that create jobs and upward mobility for the common people. These almost-a-billion-a-year guys (and yes, he notes, they’re all guys) aren’t big employers nor even big investors — these are the guys that manage the investments for the already-rich families so that the total wealth of the society can continue to be concentrated among the already wealthy, the hedge-fund managers themselves and their wealthy clients.

Krugman doesn’t mention this today, but I will. The United States has long since stopped being a leader among the nations of the world in socioeconomic mobility — that is, the likelihood that a young American of modest means will make it into affluence through hard work, initiative, entrepreneurship, all that stuff. We are turning more and more into a society in which the best way to end up rich is to be born that way.

“But why does all of this matter?” Krugman asks himself; and answers: “Basically, it’s about taxes.”

America has a long tradition of imposing high taxes on big incomes and large fortunes, designed to limit the concentration of economic power as well as raising revenue. These days, however, suggestions that we revive that tradition face angry claims that taxing the rich is destructive and immoral — destructive because it discourages job creators from doing their thing, immoral because people have a right to keep what they earn.

But such claims rest crucially on myths about who the rich really are and how they make their money. Next time you hear someone declaiming about how cruel it is to persecute the rich, think about the hedge fund guys, and ask yourself if it would really be a terrible thing if they paid more in taxes.

Have a good weekend.

Comments (12)

  1. Submitted by Tim Milner on 05/09/2014 - 11:51 am.

    As a Republican

    I agree with most of the positions the party takes. However, I seriously disagree with their position on capital gains – as demonstrated by Eric and his reference to this article.

    The tax break for capital gains was originally conceived as a way for business owners and farmers who, over the course of many years, had raised the value of their investments in their businesses/farms. The concept was simple. These “owners” over the years had already paid regular taxes on their incomes. And along the way probably hired people, paid wages, property taxes, etc. So when it became time to sell, it seemed reasonable to provide some tax break to them, in part to provide these owners a larger sum for their retirements.

    But then it morphed and was exploited by the financial services community. So now, stock traders, who from my perspective don’t create any intrinsic value in the economy (and I agree with the comment that they many times bring more instability), pay far less in taxes for their labor than the owners and farmers building up a business.

    I have on several occasions talked to various politicians about the need to modify the capital gain tax by placing a time threshold on the realization of the gain. Let an investment that is made for, say 10 years, be taxed at a lower rate. Let an investment made for only 1 year be taxed at regular income rates. Or any period of time people think makes sense. This way you encourage and reward long term investing. Which I think is in the public interest.

    After all, if I go to Las Vegas and gamble for the weekend, and win big, I get a 1099 and will pay regular income tax. How does that differ from a hedge fund manager, who bets on the market, and cashes in a few months later?

    To me it does not. And so it should be taxed the same as regular income.

  2. Submitted by Hiram Foster on 05/09/2014 - 12:33 pm.

    Capital gains tax

    The basic reason capital gains are taxed at a lower rate is to take into account factors like the time value of money and inflation. Let’s say you own shares of stock that go up 15 percent over five years. If inflation has also risen 15 percent over five years, if you sold your stock you would realize the 15 percent gain, but in fact you would be paying taxes on income when in fact you have lost money. A lower capital gains rate was intended to at least help ameliorate the loss of value resulting from holding an investment over time.

    ” How does that differ from a hedge fund manager, who bets on the market, and cashes in a few months later?

    What a hedge fund manager would argue is that he isn’t making bets, he is running a business. In your analogy, the hedge fund manager would argue, he isn’t the guy placing the bets, he is the guy running the casino.

    • Submitted by Tim Milner on 05/09/2014 - 01:58 pm.

      So Hiram

      let me a agree with your position – the hedge fund manager is the guy running the casino,

      So, would not regular tax rates be applicable to the income he has earned by running his casino? The commissions and gains he realizes day to day?

      Then, would not the capital gain tax only apply to him when he sells his casino? The difference between what he invested in his casino and what it was worth at the time of sale?

      I could live with that.

      But his routine “business income”, generated from his day to day activity of buying and selling investments, should be regular income and taxed as such. Otherwise, you differentiate income taxes based primarily on the activity that leads to its production (mine from owning my manufacturing business, his from his “casino”) . Which is a very slippery slope.

  3. Submitted by Mike Worcester on 05/09/2014 - 02:20 pm.

    What Tangible Value?

    How did it come to be that our political class put more value on the mere management of wealth–nothing more than the pushing of paper; or clicking of a mouse for modern times–than the actual making of tangible goods needed for the functioning of an economy?

    Why should those who build homes, who assemble freezers, who pick up our refuse, who help mold young minds, be treated as lesser citizens via the tax code than those whose sole purpose is to move paper capital from here to there and then claim they are “creating” economic success? It should not even be a close argument.

    Oh, and a small solution for starters, the enactment of a Financial Transactions Tax, discussed many times on this site. Let’s perhaps start there?

  4. Submitted by Ray Schoch on 05/09/2014 - 01:12 pm.

    Income is income

    There’s no reason – either ethically or economically – to tax capital gains at a rate lower than “regular” income. By definition, capital gains are increases in the value of assets or investments as a result of either a particular segment of the economy doing well, or the economy as a whole doing well. Investment of capital in an enterprise or an asset typically carries some risk, but if there were no potential for reward, no investments would be made. Ever.

    If/when a particular asset or investment gains in value, the owner of the asset, whatever that asset might happen to be, has typically done little or nothing to contribute to the asset’s increased value. The gain in value is a function of a prosperous economy, or at least the segment in which the investment was made, and is not generally due to work done by the owner of the investment or asset. Taxing capital gains doesn’t mean the government confiscates the asset and all of its increased value – regardless of the time frame involved. If “regular” income is taxed at roughly 35%, then so, too, should capital gains be taxed at 35%. It’s income, regardless of its source.

    Politically, of course, there are often plenty of facile reasons to treat capital gains differently from “regular” income. But, while it’s politically useful to endow large donors to one’s campaign with this sort of favor, there’s no economic reason to tax capital gains at a reduced rate. The income isn’t “earned” in any meaningful sense of the word, so there’s no reason to accord special treatment to it. Ethically, of course, there are lots of reasons, ranging from the Biblical to the practical, to redistribute a portion of the income from capital gains to other segments of the economy.

  5. Submitted by Kurt Nelson on 05/09/2014 - 03:30 pm.

    Zero percent

    Anyone think that as a group, these 25 guys have more than 100 employees, so they don’t create jobs. As a group, they are highly motivated to lower their tax burden even more, so none of them pay more than 20% (cap gains rate), and I would bet most of them pay much closer to zero, on a billion dollars – how is that right. Its cleaver, but it ain’t right.

    Take away the cap gain rate and replace it with even the lowest marginal rate for the average earner (28-33%), and then these obscene amounts of income might be a bit more palatable. Or, create some jobs, that would be unique.

  6. Submitted by Ilya Gutman on 05/09/2014 - 07:50 pm.


    The tax system is broken – there is no doubt about that. The problem is that Krugman was not really complaining about taxes but about the rich guys themselves. And that is what’s wrong because everyone who complains about rich CEO’s and hedge fund managers (who would still be rich even if they are taxed at a regular rate) completely ignore the other rich: athletes, entertainers, actors, etc. I wonder why is that?

    • Submitted by Joe Musich on 05/09/2014 - 10:42 pm.

      Krugman yea !

      Krugman has the credentials to be convincing. Nothing is contributed by the moneyshufflers for the greater good. The seamstress repairs something you anyone can walk away with. The hedges are monatary zombies only heartlessly shuffling. As Dylan I believe coined energy vampires. Not even a principlei is at play in their functioning. Tax em harx johnny !

    • Submitted by Paul Brandon on 05/10/2014 - 08:37 am.


      Might be because the ‘other rich’ provide something that large numbers of people find valuable (some form of entertainment), even if it is not productive in the traditional sense. Millions of people are ‘voting with their dollars’.

      And taxing financial manipulators at the same rate as the rest of us will at least make them contributors to society; part of the social structure.

  7. Submitted by Frank Phelan on 05/10/2014 - 09:34 am.

    An Odd Message

    Taxing labor at a higher rate than capital gains sends an odd message. Invest in your self (say through a college education) and we tax that at a higher rate than someone just manipulates others’ wealth.

    Do we really think that hard work is the way to get ahead? That’s not the message we’re sending.

    • Submitted by Steve Titterud on 05/10/2014 - 10:15 am.

      It is necessary to tax labor at a higher rate in order to…

      …reduce the rate of taxation of the wealthy !! To be more accurate in our use of language, we might call this a subsidy of the wealthy taxpayer by the less-wealthy taxpayer.

      It’s the American Way !!

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