Obama will not deliver on Wall Street

Obama talks tough on Wall Street today. Whether or not he deliver's on Wall Street is another question. After a month he has already discovered that talk is much cheaper than action. It was Wall Street's influence in his White House that changed up, or ambiguitized, Treasury Sec Tim Geithner's original plans for dealing with banks. Plans finally so vague that they caused a 500 point Dow day when they were announced a day late last week.

Here's Obama's new plan: treat income from trading OPM, "Other People's Money", like regular income, and tax it at regular income tax rates. Today George Soros, Warren Buffett and their ilk trade OPM and generate fee's based on the gains from that trading. Soros is theoretically retired, but still involved with his Quantum Fund. They then treat that income, the 20% fees, as if it were capital gains. So they pay taxes at a much reduced tax rate to what they would pay if that income were treated as if from doing a job that happened to involve trading. There are several points to be made.

Kudos to Obama, for the first time, for even mentioning it. However "IT" will never happen.

Every time we have had to listen to Soros or Buffett, billionaires both, say that the government should raise taxes, they meant that the government should raise your taxes and my taxes, not their taxes. Because they trade OPM they are on a different rate table than we are, and they have never spoken up when this issue has been raised in the past, nor will they now. "IT" was raised while Bush was president, and it got so little air play, and got so over-complexified, that today few know what "IT" is. Watch democrats flee this issue, like rats from a ship, when the phrase "taxing the rich" actually refers to billionaire hedge fund traders.

"IT" is one of the more bazaar and nonsensical aspects of US Tax Code so let's be clear. The line from OPM traders is that the money they make is payed to them directly from trading profits, and so their pay is literally capital gains, not income.

Here is capital gains the way you experience it. If you buy a stock, and later sell that stock, you will pay cap gains taxes on that stock. The taxes you pay are figured on the schedule D. If you held the stock long enough for it to qualify as long term capital gains, then you have a maximum tax rate, the "Capital Gains Tax" rate, that you pay. This rate changes a lot since it has been shown to be directly tied to economic activity. Both Bush W. and Clinton lowered Cap Gains Tax rates while president, and both times economic booms followed almost immediately. If you are wealthy enough to invest in a hedge fund, and the minimum is set by the SEC and was changed a couple of years ago but might be net worth of over $1000000, then your hedge fund profits would be treated the same way. See, you are risking capital in the markets. Your capital feeds progress, because companies go to these markets to raise money for their own new investments in people, equipment, marketing, or sometimes in other companies. Not unlike your savings accounts being used to loan money for new business creation by your bank. Your money is being used literally to fund progress, and in lieu of a flat tax system, the tax code rewards your behavior with lower tax rates on gains and dividends.

Hedge fund traders are not putting any money at risk. Not one dime. Their customers are, and pay Cap Gains rates as well they should. But to extend that tax treatment to the traders has never made any sense. They typically charge an administration fee, say around 2%, and they charge a piece of the profits, usually 20%, sliced right off the top. It is that 20% that turns traders like Soros and Buffett into billionaires. Because that cash is taken directly from proceeds of trading profits, they argue that their share of that cash gets identical treatment to the share that goes to the investor. For decades, this has been the case.

Their share should NEVER have been treated the same. They are not risking their own capital. Their investors are. Traders are paid from profits of trading. For one thing, if traders get the same treatment as the investor, then everyone who gets paid from those profits should get that treatment. To be consistent, if someone mows the lawn of the investor, that $30 should get treated as long term capital gains. There is NO difference. The Hedge Fund trader is being paid 20% for making good trading decisions, that is their job. Sales people for companies that build capital equipment get paid a % of what they sale, let's call that pay "commissions". Yet commissions are taxed at normal income rates, not at the rates paid by the corporation for their own gains from the sale of that equipment. Traders are taxed differently because their day to day activity resembles that of an investor or trader making profits from their own capital investments, but it is just a resemblance. They are not the actual investors, and should never have been treated as if they were the investors. They are just pretending to be the investors, by making trading decisions for those investors.

Would either Soros or Buffett be billionaires if they had been paying the same tax rates the rest of us had for the last 40 years? Good question. I'm thinking the answer is NO. When I see either of those men, I see two people who have the money they do because they have been allowed legally to cheat the tax code for their entire lives.

The business news media, and I guess we all know who I am talking about, will immediately obfuscate the debate in banalities that have nothing to do with the real issues. "Do Hedge Fund traders make too much money??" Remember that ridiculous discussion? It was just a couple of years ago. You can bet they will do it again. The real issue is as stated in this blog. Is the money paid from Capital Gains it's self Capital Gains. If it is, someone tell the guy doing the lawn!