Debate Recap: What the Heck Is Carried Interest?

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Eliminating “carried interest” was something that came up a few times during Sunday night’s debate between presidential candidates Donald Trump and Secretary Hillary Clinton.

When Trump was asked what specific tax provisions he would change to ensure the wealthiest Americans pay their fair share in taxes, he responded that he’d get rid of carried interest, but lower the tax rate for those in the higher earning percentiles from 35% to 15%.

And Secretary Clinton responded later, “I’ve been in favor of getting rid of carried interest for years, starting when I was a senator from New York.”

So what the heck is carried interest? And would eliminating it really “ensure that wealthy Americans pay their fair share?”

Defined

Carried interest is essentially a share of the profits from investment funds that is generally treated as capital gains for tax purposes. That means this income gets taxed at a much lower tax rate (up to 25%). Carried interest typically is given to general partners of investment funds, who receive it in exchange for managing a profitable fund, according the Tax Policy Center.

According to the Center, some argue that that carried interest should be taxed at the 39% income tax bracket. Others argue that these fund managers take risks, just as entrepreneurs do, so they should be able to take advantage of the lower tax rates for capital investments. Still others defend the status quo, saying that corporate income already faces an unfair double taxation (saying that C corporations are subject to corporate taxes and individual income taxes when realized or distributed.)

The Heart of the Debate

“We’re just debating the characterization of that income,” says Martin Cantor, CPA and director, Long Island Center for Socio Economic Policy. “Is it capital gain income (and taxed lower) because it’s generated from an investment? Hedge fund managers say yes. Others say no, it should be characterized as earned income as a bonus for doing well. And that would be taxed at 39%. Those who are not making the money feel they should be paying more.”

Politicians are playing to the crowd during election season and when the crowd cries that the rich people are getting richer, they might not be taking into account that they’re getting richer because they’re taking big risks, explained Cantor.

“Some would say it’s their bonus over and above their salaries for making good investment decisions for all the investors, so it should be different,” says Cantor.

“This country is great because of capitalism,” said Cantor. “The fact of the matter is, we’re built on people who invest money and take risks for the profit motive. And if they take those risks, they get rewarded by having more income.”

But What Affect Would It Have if it Were Eliminated?

Taxing the carried interest as ordinary income wouldn’t generate a huge sum for the tax base, according to the Tax Foundation. It would raise $15 billion over the next decade, on a static basis.

“Carried interest represents only a very small portion of all employee compensation. Thus, the economic impacts of this tax change would be small,” according to the Tax Foundation website. However, the Tax Foundation also found that eliminating it could result in a net loss of 2,200 jobs.

The politicians didn’t talk about the rising debt levels of the average American household, whether people can afford their mortgages, or even the growing problem of identity theft. That doesn’t mean you should be ignoring how these issues can impact your personal financial situation by implementing good budgeting methods and not falling into debt. You can stay on track by getting a snapshot summary of your credit report, updated every 14 days, on Credit.com.

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These 25 People Made $10,000 a Minute Last Year

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They’re the top paid hedge fund managers, and boy did they make a lot of money last year. If you want to know how long it would take you to earn what they earned in just 2015, keep reading. If you find harsh reality upsetting, stop now. (Just kidding, keep reading.)

Institutional Investor’s Alpha magazine put out its ranking of the top-earning hedge fund managers earlier this month, showing that the top 25 earners averaged $517.6 million in 2015 for a total of $12.94 billion. That breaks down to about $4.7 million per day for each manager, or roughly $10,000 per minute.

Let’s put that into perspective. Ten thousand dollars a minute is basically enough to buy the world’s most expensive burger for lunch ($1,786, including the gold leaf and truffles), and still have plenty left over from your first hour’s earnings to take a two-week-long private-island vacation on Musha Cay for $37,500 per day (for up to 12 guests).

So how long would it take the average American to earn $517.6 million? Here’s the scary math: Using the latest statistics from the government, the average American household earns $51,939, or about $25 an hour. At that rate, it would take about 10,000 years. Basically, that’s working continually since the Ice Age around 8000 B.C.

To match the top earning hedge fund manager at $1.7 billion, the average household would need to toil three times that long, or 30,000 years – basically since humans first started drawing pictures on cave walls.

To look at it another way, every resident of Sedona, Arizona, (Population 10,111 in 2013) would need to make that $51,939 to match one manager’s salary. To match the highest paid hedge fund manager, every resident would have to earn more than three times that, or roughly $170,000 a year.

If you aren’t dizzy yet, here’s another view:

The top 25 hedge fund managers earned more than all of the country’s kindergarten teachers combined. As Bernie Sanders pointed out – that’s 58,000 teachers earning just $8.5 billion in total.

Not to put too fine a point on it, but the top hedge fund managers even earned more than some major companies. Venerable shoemaker Nike, for example, earned $8.03 billion in 2015.

While you may never earn as much as a hedge fund manager, there’s plenty you can do to solidify your finances. You can start an emergency fund to ensure unexpected expenses don’t put you in a jam. You can pay off your credit cards every month and minimize other debts you owe to keep your credit in tip-top shape. And you can track your credit health by pulling your free annual credit reports at AnnualCreditReport.com and checking your free credit scores, updated monthly, on Credit.com.

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