It is September. School is starting and kindergarten teachers across the nation are making their way back to their students. Many are buying supplies for their students from their own stressed personal funds. Most are making under $40,000 a year and are generally taxed at a rate of about 25 percent. Sometimes over 30 percent.
The 2016 election season is also starting. Hedge funds managers are trying to decide which candidate will be best for business and who they will put their money behind. Money that is taxed at a rate of 20 percent or lower a year . Top hedge fund managers make in excess of $200 million dollars annually -- in many cases, billions.
If something doesn't quite seem right with this scenario, that's because it shouldn't. Why are kindergarten teachers being taxed so much higher than hedge fund managers when they make so much less? That is the same question posed in the new short by Brave New Films: Hedge Fund Billionaires vs. Kindergarten Teachers: Whose Side Are You On? (Available above.)
In a recent article, Vox did the math and found that the top 25 hedge fund managers make more (in fact double) than every kindergarten teacher in America combined. As if that news wasn't troubling enough, they are also taxed at a significantly lower rate. The reason is simple: The carried interest tax loophole otherwise known as the hedge fund managers' tax subsidy.
This tax loophole, created by the IRS in 1993 was never even intended for hedge fund managers. In fact, when it was created there was no such thing as a hedge fund. The carried interest tax loophole was initially created for real estate and small business. The premise was simple: entrepreneurs and small businesses take greater, longer term risks than buying and selling off shares of stocks. Because they invest so much and so much time, they deserve a tax break. Fair enough.
As hedge funds began to emerge in the late '90s, they began to apply the taxes to themselves since they took commission off of their clients' earned income in long-term investments. Even though it was dubious at the time, so few hedge funds existed and were so small and relatively new at the time, the IRS allowed it.
Twenty years later, times have changed.
Now, hedge fund managers are some of America's wealthiest people. Presidential candidates court them for healthy donations. Some make billions of dollars a year not just on singular clients, but on pensions and endowments. And they still use the carried interest tax loophole. They argue that, because part of their own compensation is based on how well their investments perform, they too are taking a risk that justifies special tax treatment. But that perverts the original intent of the carried interest law, which was to reward entrepreneurs who take a risk by investing their own money in order to grow the economy.
Hedge fund managers mostly don't invest their own money, they invest the money of kindergarten teachers, firefighters, social workers, and other workers whose pensions they manage. In fact, they typically have very little, if any, skin in the game in their investments. If their investments fail, it is the pension funds and endowments who are on the hook for the losses. The hedge fund managers will still make money for managing the failed investments, but they may have to forgo their performance-based bonuses. The idea that such a large tax break should apply to these managers is both unfair and exploitative.
The good news: it's far easier to fix this problem than having to maneuver through Congress to get a change. The carried interest tax loophole is completely in the hands of the IRS, headed by the Secretary of the Treasury -- a member of the President's cabinet. That's right, with one telephone call, the next POTUS could fix this mess. The problem is the money hedge fund managers give to campaigns. Not so ironically, hedge fund managers are huge contributors to politicians in both parties. Making it very unlikely that whoever wins the 2016 elections will end the carried interest tax loophole without significant pressure from every day Americans. It is seen as something we can effectively live with, as we have for some 20 years.
But can we live with it? What could teachers do with the money we see hedge fund managers make with the carried interest tax loophole? Well, we've run some numbers. If hedge fund managers were taxed like everyone else, there would be at least $17.7 billion extra tax dollars. That money could:
● Pay the salary of 560,000 new classroom Aides for overcrowded classrooms
● Purchase 1,700,000,000 new books for students instead of teachers having to buy them out of their own pockets
● Fund free school lunches for the entire country with $5billion dollars to spare.
It is time that anyone running to be POTUS does more than lip service to one of the most egregious tax evasion schemes and one of the biggest contributors to the 1 percent stealing from the 99 percent. That is why Brave New Films and Mayor Bill de Blasio have issued a challenge to all 2016 Presidential Candidates: Commit to ending the carried interest tax loophole in your first 100 days of office.
No more rhetoric. No more empty promises. It is time to give this country real financial change and to stop valuing the rich over the everyday working American. Watch our film Hedge Fund Billionaires vs. Kindergarten Teachers: Whose Side Are You On? and stand with us on this challenge. Our children's future is far more valuable than continuing to pad a hedge fund manager's bank account.