Monday, July 16, 2007

Return of the self-refuting column

Paul Krugman discusses redefining "carried interest" as income in todays San Jose Mercury News (my boldface):
What's at stake here is a proposal by House Democrats to tax "carried interest" as regular income. This would close a tax loophole that is complicated in detail, but basically lets fund managers take a large part of the fees they earn for handling other peoples' money and redefine those fees, for tax purposes, as capital gains.

The effect of this redefinition is that income that should be considered by normal standards to be ordinary income taxed at a 35 percent rate is treated as capital gains, taxed at only 15 percent instead. So fund managers get to pay a low tax rate that is supposed to provide incentives to risk-taking investors, even though they aren't investors and they aren't taking risks.
Tax cuts provide incentives to private individuals to engage in economic behavior. Who knew? Anyway, this position gets contradicted a few paragraphs later when Krugman writes (my boldface):
There's a larger question one could ask: Should we even be giving preferential tax treatment to true capital gains? I'd say no, because there's very little evidence that taxing capital gains as ordinary income would actually hurt the economy. Meanwhile, the low tax rate on capital gains is one main reason the truly rich often pay lower tax rates than the middle class.


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