Hedge-Fund Managers Eyed by Congress for Medicare Tax

Date: Friday, September 7, 2007
Author: Alison Fitzgerald, Bloomberg

Sept. 7 (Bloomberg) -- James Simons, the highest-paid hedge- fund manager in the U.S. last year, could pay enough in Medicare taxes to provide health insurance for about 4,800 senior citizens.

Such estimates are being cited by backers of a proposal in the U.S. House of Representatives to raise taxes on hedge-fund and private-equity managers. Simons, the Renaissance Technologies Inc. chairman, earned $1.7 billion last year, according to Institutional Investor's Alpha magazine; his income is largely exempt from Medicare and other payroll taxes because it is considered a capital gain.

The House measure, sponsored by Representative Sander Levin, a Michigan Democrat, would require those earnings to be classified as compensation and subject them to the 2.9 percent Medicare tax. He and other lawmakers are using the image of billionaires avoiding Medicare payments to win support for requiring fund managers to pay taxes at rates as high as 35 percent instead of the 15 percent capital-gains rate.

``Tax equity is really the basic issue here,'' said Levin. ``Those who pay 15 percent don't pay Medicare when those who pay the higher tax do.''

The change, which would raise as much as $1 billion annually and cover the cost of insuring about 98,000 people, would provide a small boost for Medicare, which is projected to exhaust its assets by 2019 as the U.S. population ages and health-care costs rise faster than inflation.

`Every Bit Helps'

``It's a pretty small percentage,'' said John Holahan, a senior fellow at the Washington-based Urban Institute who studies health-care finance. ``But for a program that is going to face increased financial pressure, every bit helps.'' The program will provide health-care coverage to more than 40 million people this year at a cost of $436 billion, the nonpartisan Congressional Budget Office said in a report last month.

Simons, 69, hasn't taken a position on the tax proposal, his spokeswoman Joan Campion said. She wouldn't confirm his reported income or comment on the Medicare tax.

Robert Stewart, a spokesman for the Private Equity Council, a Washington-based trade group for the largest buyout firms, said the industry opposes any tax increase and rejected Levin's assertion that the fund managers aren't paying their fair share.

`Significant Portion'

Private-equity managers ``pay Medicare, payroll and other taxes on their ordinary income, which can represent a significant portion of their earnings,'' Stewart said. ``Like everyone else, they pay long-term capital-gains taxes on the profits they earn from the sale of appreciated capital assets.''

Levin's bill could more than double the tax rate for some buyout-firm managers because most of their gains are long-term and currently qualify for the 15 percent capital-gains rate. Hedge-fund managers would see less difference because their short-term gains already incur a 35 percent tax. The 2.9 percent Medicare levy would be new to both groups.

Estimates vary widely on how much Medicare income and tax revenue Levin's bill would raise. Congress' Joint Committee on Taxation hasn't yet issued a revenue estimate.

Victor Fleischer, a law professor at the University of Colorado, said private-equity managers alone may generate about $580 million a year in additional Medicare funds if Levin's bill is enacted. That figure may more than double when hedge funds and venture capital are added to the mix, Fleischer said.

$7 Billion

Viva Hammer, a former Treasury official now at the law firm of Crowell and Moring LLC in New York, said the top 25 hedge-fund managers alone could generate $7 billion for Medicare over 10 years. That is equal to the cost of insuring about 68,627 retirees each year.

The National Women's Law Center, a Washington-based advocacy group, said in a report this week that the managers are ``depriving Medicare of $900 million to $1.8 billion per year'' by avoiding payroll taxes. ``This is enough to pay the Medicare hospital costs of 204,000 to 408,000 Americans,'' the center said in a statement.

Medicare spends about $10,200 each year for a retiree, so every $1 billion in additional revenue would provide coverage for 98,039 senior citizens.

``This is a big factor for Congress to consider as it works to determine if the capital-gains tax laws are operating as intended,'' said Senator Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee.

Senate Hearings

The House Ways and Means Committee held hearings on the bill this week, and the Senate Finance Committee held two hearings in July. Finance Committee Chairman Max Baucus, a Montana Democrat, and Grassley said they are considering drafting their own legislation in the Senate. Democratic Senator Charles Schumer of New York said he would support a bill that raises capital-gains taxes on all partnerships rather than exclusively on investment firms.

Some experts said Levin's proposal would generate little or no new money for Medicare and the general fund. ``I'm skeptical about raising a lot of revenue out of this because people will plan their way out of it,'' said Daniel Shaviro, a tax-law professor at New York University.

Still, supporters of the measure said lawmakers are likely to push ahead.

``Rank-and-file workers have to pay Social Security and Medicare taxes,'' said Grassley, who hasn't taken a position on the House proposal. ``These are questions of tax fairness.''

To contact the reporter on this story: Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net