Paul, I have a tremendous amount of respect for you. In many ways you serve as a role model to me.
But I think you need to be careful calling what Arrington describes a "loophole." Yes, the people running the funds are the beneficiaries of this specific "hole" in the tax code. But have you considered that this could be a loophole by design? In other words, an incentive?
In many ways, capital is the eponymous character of capitalism. Capital drives our economy. It feeds our society. It's also a good indicator of our prosperity level.
No economist will argue with the fact that capital begets more capital, and therefore we should encourage any mechanism that creates it. Normally I avoid such generalities, but economists accept this as such a simple fact that it would be impossible for them to disagree with it.
This "loophole" in the tax code is a great example of an incentive for investing capital. It makes sense to place that incentive in the tax code because investing capital leads to more capital. Policy makers want people running funds to "exploit" this "loophole." The tax benefits are a reward for efficiently "putting the capital to work," so to speak.
If we can agree that this "loophole" in the tax code functions as an incentive, then I think we should also agree not to call it a loophole. When we call this a loophole rather than an incentive, we make it appear as though our profession (well, your profession... I'm still in college) is the business of exploiting loopholes. That is not what we value and I think we should respect ourselves enough to avoid this perception.
Of course it was created as an incentive, there's a nice justification for pretty much every line of the millions in the tax code, however it is considered a loophole because it turns out that it is really easy to manipulate the structure of investment deals so that all the income is gained as carried interest, and it even more surprisingly turns out people actually do this if there's sufficient incentive, so a lot of people now redefine what would have been 'income' into 'carried interest' in a way that appears not to have been intended when the rule was created.
If you really want people to respect your profession (I assume you intend to go into finance?) you should focus a little more on the ethics of what you actually do and less on how to spin it.
I have a lot of respect for your comment and do not mean for this to sound like an ad hominem attack, so please take it as an observation on the societal state of affairs: what you describe as "spinning" I describe as "offering my opinion."
I think the fact that you would describe my opinion as "spin" is indicative of the larger societal disassociation with members of the financial sector. Because of this, people do not like hearing the financial sector described in positive terms. So, often when people are confronted with a positive viewpoint of it, they have no recourse but to caste it as "spin."
Society has harbored a distaste for finance many times throughout history. The Catholic church even went so far as to forbid usury, preferring to delegate tasks as inferior as money lending to Jews. Not surprisingly, this distaste becomes most evident following an economic downturn. Before the current recession, society's view of "Wall Street" was generally very positive. Now, things are a bit different.
The fact of the matter is that we do not live in an ideal world. But we want to move toward one. The best way to do that is through a strong economy. A financial sector is a necessary part of a strong economy. But I worry that people discount its value to our country.
As long as people view the financial sector distastefully, we are going to need to incentivize working in it. Otherwise the only people working in the financial sector will be people who don't care if they are viewed as working in the dregs of society. That is not the type of person we want in charge of the economy.
Yallah yallah! Your ability to deny reality is amazing!
We do not need to further incentivize working in finance. Finance has already eaten most of the rest of the economy. This is shown by the fact that from roughly the 1980s onwards, FIRE sector has grown immensely, not only in total profits/revenues but as a share of all profits in the United States.
If finance is supposed to make its living by enabling other sectors to grow, then finance should not be outgrowing the other economic sectors. It should remain as a roughly steady proportion of total profits and grow with the economy.
Instead, finance, real-estate and insurance have grown at the expense of the rest of the economy and the rest of society. That's not doing their stated job, that's parasitizing everyone else.
That's nice for you, but as long as capital remains a legally separate category from all other income, the only thing accomplished by differential taxes on "capital gains" is to give a government favor to a narrow class of "capitalists".
As others in this thread have pointed out, there are plenty of highly productive, successful people like top Google engineers who aren't part of the financial sector, the executive class, or the investor-for-a-living class, and they get hit with higher taxes than the capitalist class because they dare, the sheer chutzpah, to take home most of their very-high incomes as salary rather than dividends, interest, or asset appreciation.
I'd like to see individuals making a high salary get their taxes slashed down to the levels that asset-based wealth currently enjoys. This can't take place unless the disproportionate influence of finance capitalists is likewise slashed. I wouldn't necessarily hold my breath for that; the governments of the world are as rotten as they've ever been.
So, wait - I understand how this might be an incentive so that Arrington's investors invest more capital - they pay low taxes on any gains the fund produces. But, why is also Arrington himself, as the fund manager, paying non-income tax, even though all the money he makes is his proper income, and not money produced by his capital investments (as he has no capital invested)?
Sorry, I meant to address this question in my original post. You make a valid point. This is not Arrington's money, so why is he being rewarded for investing it? Shouldn't the investors themselves be the ones rewarded?
The answer I see to this is that Arrington is rewarded because he is making the investments on behalf of the investors. I would hazard a guess that many of the people investing in Arrington's fund made their money outside of tech, and therefore do not possess the skill set to critically analyze tech investments. But they know the technology sector is a good place to invest, so they hand their money to someone with the proper skill set to invest in it. In this case, that person is Arrington.
He is rewarded because were it not for him, the people investing in his fund would be unable to intelligently invest in the tech sector.
But you could make the same statement for everybody - if it were not for the ordinary workers, capital would have no meaning. So why not give incentives to workers as well by giving them a low interest rate?
I must say this is a pretty weak argument. However honorable the activity is, he's still a hired gun.
Another question you have to ask - if his income was subject to income tax versus a LTCG tax that's currently in place, would he stop doing what he does? Reading his original post, most likely not. Maybe he'd raise a larger fund next time to justify the 2/20 fee structure, maybe the structure will be changed to 5/20, but investors will still chase the yield, and there will be someone on the receiving end happy to accept investors' money.
What you just described - - someone doing skilled work on behalf of others who might not know how to do it - - is called "hiring someone", and in every other sector is accompanied by the regular income tax.
Remember, carried interest is different than capital gains, which would suit your argument better.
It is good, but he most certainly isn't unique in this regard and he is late to the game.
For several years, Fred Wilson has written that "carried interest" should be taxed as ordinary income. For instance, see http://www.avc.com/a_vc/2010/05/why-taxing-carried-interest-... (and my guess is that Fred Wilson earns more carried-interest-income than Mike Arrington whose biggest payout was probably the sale of TechCrunch.)
I'm sure that many other investors (e.g Nick Hanauer, here in Seattle) have the same (or more progressive) positions
Btw on some of the other comments ...this fiscal deal wasn't about cutting loopholes. It covered a lot of other more-urgent stuff. There is no way they could have tackled less-urgent stuff in this bill.
However, in the past, Obama has called for cutting loopholes and he stressed that point in his speech tonight. Last year, in October, Romney had also stressed the need to cut loopholes. Cutting loopholes is very hard because each loophole has a strong lobby behind it, but I hope the two parties are able to agree on cutting some of these outrageous loopholes.
He does specification call this out - that something must be truly egregious when the beneficiaries of a law call for its repeal.
What's your position? Should we discount investment taxes to encourage reallocation of capital and tax earned income highly to discourage value add labour, or stop asking actual workers to suck it up because they can't flee like capital can?
Private property is just as coercive as taxation in the first place. You do not have a God-given right to make hundreds of thousands of dollars by investing millions of dollars and pay nothing towards the upkeep of society. Basic freaking social contract theory, and, in fact, basic law: financial instruments and corporations could not exist as they do except by government fiat.
Second, yes, he will make the sacrifice if everyone else does it. That's sensible. You don't solve large-scale systemic problems by individual action, not even mass individual action, but only by collective action. Again, this is just how the world works.
When did anyone ever get asked if they consented to the "social contract"? No one. We need, at the very least, to change the term. Something like "social compulsion", perhaps?
The person creating capital may not be someone who is liked, but they often produce jobs, and products/services that people want. Their capital comes about because of voluntary transactions within society. The so-called "social contract", meanwhile, is built on coercion.
But if I don't consent to the "social contract" called private property rights, then your exercise of the rights that you've claimed that I don't recognize seems equally coercive.
I happen to believe (in agreement with you, I think) that private property rights look more useful (in a benefit-to-humanity way) than the rights that most people who use the term "social contract" think of, but I don't believe there's a clear philosophical difference between the two.
Private property, financial instruments and corporations are also built on coercion. Literally, they all exist by government fiat.
You can tell yourself whatever Rothbardian fables you like, but the only real business you're building without any participation in a modern, "coercive" society is a subsistence farm.
You are correct that government currencies exist by government fiat. Who said that those had to be the only currencies? Of course government does mandate that its currencies are recognized as legal tender, but that's something that governments get away with across the board.
Corporations are indeed creatures of government. Are they required to conduct business? No, but they are awfully convenient, and allow for a lot of rotten things to occur.
Private property? If it requires government's nod, it isn't private. And, of course, we see this all the time, when government decides that it wants someone's property, and takes it. It might be your land, your automobile, or something else. It is all up for grabs.
Not sure why you're name-dropping Rothbard, but it doesn't help you here. No business is going to exist without participating in the existing society. Trade and commerce require cooperation. The alternative is what brings a society closer to subsistence farming (and it tends to leave people starving).
That's a bit of a strawman, since I said nothing about the securing of property. As you are undoubtedly aware, government does not allow a choice in this, but you're likely taking a position that it must be this way. You're also taking the rather weak stance that existing precedent doesn't allow for any other way. That kind of thinking serves governments well (they don't think well outside of the box), but not private individuals and groups.
No, I'm taking the stance that bourgeois governments are the result of a long historical process whereby the mighty displaced the weak and stole their property until there was eventually only one ruler, who enforced the property regime of their liking.
Something to that effect has undoubtedly occurred. I think that things can work differently. Do you?
We've had a chance to see a number of government experiments run their course (some continue to), ranging from absolute monarchies, to Marxist-Leninists, to Maoists, to various kinds of republics. All of them have ended up going in similar directions, over time, consolidating power, though at different speeds.
It's not as selfish as you try to spin it. There are any number of political and economic policies that you might favor, but that only make sense in aggregate.
I might favor more NASA funding, but I'm not going to write a check and donate to NASA. That doesn't make my desire for more NASA funding any less earnest than someone who wants less funding for NASA.
Not sure if selfish quite captures it. It's more practical consideration. I'll give you X, if everyone else is also giving you X. Otherwise, my X won't make any difference.
Looking at again: it's a variant of the prisoner's dilemma. If everyone moves, nobody is worse off. If you move on your own, you are worse off. If everyone else moves and you don't, you're best off.
Unsurprisingly, the dominant strategy is to write blog posts saying "we really ought to amend the taxation laws" :D
