Big Government Grover and the Fund Manager Subsidy

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Dean Baker
Truthout, July 23, 2007

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Political activist Grover Norquist has been one of the right-wing's most forceful voices over the last two decades. Along with Newt Gingrich, he was one of the main architects of the Republican takeover of Congress in 1994. His track record makes him a powerful voice on the right. His name sparks fear in the hearts of many on the left.

One of Norquist's current causes is the protection of the tax subsidy enjoyed by the managers of hedge funds and private equity funds. While people with middle class jobs like teachers and firefighters typically pay a 25 percent tax rate, and higher-paid professionals like doctors and lawyers pay a 35 percent rate, fund managers are taxed at just a 15 percent rate on their earnings.

This special deal is the result of the fund manager tax break that applies a lower tax rate on compensation earned by the people who manage hedge funds and private equity funds than on other wage income. As a result, these fund managers, many of whom earn more than $100 million a year, and some who earn more than $1 billion a year, pay a lower tax rate than a school teacher earning $50,000 a year. It is important to realize this lower tax rate is applied to the money they earn as a manager. The tax code already applies a lower 15 percent tax rate to investment income, including investment income from money that fund managers actually invest in their funds.

Norquist is concerned because many members of Congress now want to tax fund managers like teachers and firefighters, subjecting them to the same tax code. Apparently, being subject to the same tax rates as ordinary workers will make life really tough for these fund managers.

Many people, no doubt, share Norquist's sympathy for the plight of fund managers. The cost of living is soaring for fund managers. A proper vacation home can easily run into the tens of millions of dollars, as can a decent sized home in the Hamptons. The price of yachts and private jets keeps getting higher as do luxury boxes at major sporting events. And an elite private nursery school - a necessity for getting children on the right track in life - can run $40,000 a year. That's almost two hours of work for many fund managers.

While the situation of fund managers may be dire, we have to ask ourselves whether subsidizing them is really the proper role for government. Those people who sympathize with the hard times facing fund managers can always contribute to charities that help them make ends meet. They can even hold bake sales and walkathons, involving the whole community in voluntary fundraising efforts to assist the fund managers.

However well-meaning Norquist and his colleagues might be in their desire to help fund managers, this is not the place for government. The government should not be raising the taxes of school teachers and firefighters to subsidize fund managers.

The size of the subsidies Norquist wants for his fund manager friends is truly astounding. The special tax break for a fund manager earning $1 billion is worth $200 million, enough to provide health care insurance for more than 60,000 kids.

What is really so special about the fund manager tax break is it exposes the right-wing for what it is, not a principled movement for small government, but rather a cabal that aims to use the power of government to shift as much wealth and income as possible to those at the top. Grover Norquist has been quoted as saying he wants to shrink government down to the size where he can drown it in a bathtub. When it comes to those portions of the government that function to redistribute income from the poor and middle class to those at the top, this sounds like a very good idea.


Dean Baker is co-director of the Center for Economic and Policy Research, in Washington, D.C. He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, Beat the Press, where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.