TRUMP: Hedge Fund Guys Are Getting Away with Murder

Pensions, sovereign wealth funds, endowments and wealthy individuals are all major types of investors in hedge funds. Hedge funds and private equity funds pay capital gains tax versus the higher percentage amounts of an income tax. The top rate for capital gains is 20% versus the top rate on regular income of 39.6%. The argument is contentious on both sides. Raising taxes on risk taking could have a drawback on investing. This is compared to an argument that many Americans aren’t able to pay lower capital gains and face higher-rate income taxes in traditional 401Ks and IRAs.

Hedge Fund Profitability

Hedge funds could be at risk for new taxes. Two contenders gaining much traction in U.S. presidential polls are Democrat Primary Presidential Candidate Bernie Sanders, and on the opposite side of the political spectrum Republican Primary Presidential Donald Trump, both having positions on hedge funds in which an increase in taxes is possible. On the CBS show “Face the Nation”, on August 23rd, Trump stated he would change the tax system to make hedge funds pay more in taxes. In the exchange, Trump said, “They’re paying nothing and it’s ridiculous. I want to save the middle class.” He adds, “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky.”

In his campaign, Sanders introduced ways to pay for public education and to impose a “Robin Hood” tax on hedge funds, investment houses and other “speculators” of 0.5% on stock trades, 0.1% fee on bond trades and a 0.005% fee on derivatives.

Basket Options

Hedge funds like Renaissance Technologies, a US$ 25 billion hedge fund founded by James Simons, have used unique structures to avoid taxes, one such is called a basket option – complex financial structures that allowed these hedge funds to bypass taxes on short-term trades. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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