Thursday, June 21, 2007

Taxes Are Death - To Comics and Journalists

I watched a young comic die a horrible death at an open mic night last week. He took the stage with a good premise, a Richie Rich family schemes to ensure the death of its ailing patriarch in 2010 - not before and not after - because 2010 is the one year in which there will be no estate tax due to some odd Congressional machinations. The idea was to use the estate tax as a springboard into a very extended weekend at Bernie's. The crowd went into stunned silence at the first mention of estate tax and never recovered. If you need to explain a joke, it's not funny.

Today's NY Times runs a page 1 story on an end to tax breaks for hedge funds. Like most tax stories in general periodicals, it repeats buzzwords like tax break, hedge fund, wealthy financier, but never attempts to explain the fundamental question. This is not a story I have followed, but I hope a short example captures the basics. Ace, an expert investment manager, and Benny, a retiree who wants to spend all his time on the beach at the Jersey shore, start a partnership. Ace invests only one cent, but he will do all the work. Benny invests $100. If the partnership has profits, Ace will get 20% (known as a carried interest), Benny 80%. After much research, including tasting, Ace buys a barrel of single malt scotch whiskey for the partnership. The partnership holds it for ten years and sells at a big profit. Is Ace's share earned income, because it's compensation he received for managing the partnership, or is it long-term capital gain, because the whiskey was a capital asset the partnership held for a long time?

If you don't like the answer capital gain you can call it a tax break, but this is not some new loophole, it has been the law for decades. Most hedge funds will have short-term gains so the answer won't matter much to them, the impact is greater on private equity firms. Like many tax issues, it will effect wealthy financiers, but even some Mom & Pop partnerships have carried interests for a working partner. Loaded terminology with no real explanation avoids the question. Which answer, earned income or capital gain, best serves the competing interests in any tax question: raise revenue; strive for simplicity, consistency and stability; and don't disrupt the incentives needed to make a capitalist economy work? Is this too complicated for the reader...or for the reporter? If you need to explain a story, find a way to do so.

In a related story, love the lede on "reclusive and authoritarian Turkmenistan" - is President Gurbanguly Berdymukhammedov really reclusive? Maybe he can't get any coverage because media fears misspelling, mispronouncing that incredible name.

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