Our President and both houses of Congress have finally all agreed on a deal on this whole fiscal cliff mess. I’ve been holding my breath on this because I thought for sure that I’d be paying a lot more in taxes this year. But I dodged the bullet.
All venture capitalists did, actually.
Nothing the government agreed to in the last few days actually affects the asset wealthy in this country. If you’re a Hollywood agent barely getting by with a million dollar a year salary and two ex spouses, your life sucks right now. You’re going to have barely any money left over at the end of each month for cocaine with the tax increase. Small business owners will also take a hit because their business profits are considered income in most cases.
Luckily I’m not in any of the groups who are being affected much. I have some money in the bank from selling TechCrunch a couple of years ago, which of course isn’t taxed on an ongoing basis. So I’m good there. And even better, there hasn’t been a word mentioned about the carried interest loophole.
Most of the money I make now comes from investments from CrunchFund. And the vast majority of that is what’s called carried interest. Even though I’m investing other people’s money, the government calls it a capital gain. So instead of paying 39.6 percent on that money (I won’t call it income), I pay only 15 percent (or maybe 20 percent under the new rules – it isn’t clear to me).
In other words, income is a sucker’s game. Carried interest rocks.
Everyone wants the rich to pay more in taxes. They’re thinking about Mitt Romney and Warren Buffett when they say “rich people.” But really rich people like that are totally protected. Their accumulated wealth can only be touched by inflation. And if they’re in the hedge fund game, most of their “income” is taxed at just 15 percent.
Which is why Warren Buffett can pay a lower tax rate than his secretary. And why, even after calling for tax increases for the rich, he’ll still be paying a lower tax rate than his secretary.
Kill This Loophole
Many of us benefiting from it have been asking for it to end for years because it is so vastly unfair.
It’s not often that something is so egregious that even the people benefiting from it are asking for it to go away.
Why hasn’t it been closed? There are two reasons, I think. The first: intense lobbying efforts from the super rich keep crushing any moves to end the carried interest loophole in Congress. Democrats and Republicans like the kind of money these people can donate to their campaigns. And second, it’s just so complicated to explain. Everyone understands how normal income works, and it’s super easy to say “tax the rich.” Explaining how the super rich don’t even really deal with income tax stuff is just too complicated.
So we end up with something that the super rich love – new taxes on other people.
The government gets to appease the masses by taxing high-income people a little more. And the people who are actually rich get to keep things the way the are. It also keeps those pesky upstarts with a lot of income but few assets from accumulating enough stuff to enter the super rich club.
The only problem is that all this tax theater isn’t going to do anything at all to address the massive deficit and debt problems we have. Just look at this chart. All that work and drama for just $60ish billion in annual revenue.
The middle class need to get ready for big tax increases in the near future. That’ll happen before spending cuts can be stomached by this country. And God help us if interest rates rise and the cost of debt financing increases.
We are so screwed. But for now, I’m totally good. Thanks, Congress!