Is Eliminating a Tax Break a New Tax?

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Friday, 25 June 2010 05:25

The Washington Post reported on the Senate's refusal to extend unemployment benefits. At one point it referred to plans to change the tax treatment of income earned by managers of hedge funds, private equity funds, and real estate funds as a "new tax."

Currently, much of the income of these managers is taxed as capital gains even though it is paid in exchange for work. As a result, many of the richest people in the country are paying a 15 percent tax on their earnings (if they cash them out -- there is no tax paid on money left in the fund), instead of the 35 percent rate that high earners would otherwise pay (39.6 percent after the end of the year). The proposed change in the tax code would treat some of their earnings as labor income subject to ordinary taxes. It is not clear that change should be described as a new tax.

The article also discusses the additional debt that would incurred if the unemployment extension bill was approved by Congress. It tells readers that the proposal would have increased deficits over the course of the decade by $33 billion. It would have been helpful to note that this is equal to approximately 0.02 percent of projected GDP over this period.