How an Egregious Tax Loophole Could Save This Billionaire $700 Million Next April

David Tepper topped the list of best paid hedge managers for last year, pulling in $3.5 billion. That's an astonishing amount of money for one person to make in a single year -- and is larger than the annual GDP of 35 countries. But equally astonishing is what a low tax rate Tepper will pay on these winnings, assuming they are treated as "carried interest" and taxed as capital gains, not regular income. 

 

If Tepper was a resident of W-2 land, like most Americans, here's what his tax bill would look like: His earnings would be taxed at the top federal income rate of 39.6 percent. On top of that he'd pay a 3.8 percent Medicare tax. And on top of that he'd pay the top New Jersey tax rate (where he lives) of 8.9 percent. 

 

All told, Tepper would face a 52.3 percent tax rate on his $3.5 billion, which would mean about $1.8 billion in much-needed new government revenue at a time of large deficits and draconian program cuts. 

 

Of course, David Tepper doesn't live in W-2 land with the rest of us. His more likely tax total rate will be comprised of the 20 percent tax on capital gains, the 3.8 percent tax on Medicare, and New Jersey's 9 percent tax on capital gains -- for a rate of 32.8 percent. Instead of kicking in $1.8 billion to help fund civilization, he'll kick in $1.1 billion -- and save $700 million. 

 

Now, mind you, these numbers are pretty speculative, and I'm also no accountant. Not all hedge fund managers treat their winnings as carried interest. Some think that's just plain wrong. But most do and the carried interest loophole lives on -- along with the favored treatment of capital gains generally -- because of the political power of the donor class, which cares intensely about these things, even as most Americans rarely think much about esoteric tax issues. 

 

How much is $700 million in budgetary terms? Well, it'd be enough to rehire 10,000 of the teachers laid off during recent hard times and help reduce crowded classrooms. Or provide the maximum Pell grant to -- get this -- 125,000 needy college students. 

 

So here we have, to close out the week, a quick snapshot of one very screwed up corner of public policy. We live in a country that gives huge tax breaks to billionaire speculators while trying to teach our kids in classrooms with 30 students and driving poor college kids into debt -- or out of school altogether.