Hedge Profit Shows Tax Flaw

Date: Thursday, April 17, 2008
Author: HFN Daily Report

In 2007, Wall Street nickel-and-dimed its way to $2.8 billion in profit, it's lowest since 1994. Big Apple hedge funds, meanwhile, made a killing by any standard, hauling in up to $39 billion. But while all that hype about hedge funds being the real money makers might be true, just don't chalk up that discrepancy to talent, a study said.

The Fiscal Policy Institute in its study said the money earned by hedge funds last year proved how outdated the tax system in New York has become. The report called for hedge funds and private equity to shell out more to Uncle Sam, a call frequently voiced on Capitol Hill.

The institute said alternative asset classes should be subject to the same unincorporated business tax as small businesses in New York.

"In view of New York's historic income polarization-the greatest in the nation-taxing the compensation of a private equity managing partner that can run into the tens of millions and higher on the same basis as the business income of a smaller business owner seems like an incontrovertible and overdue tax change," it said.

New York could generate another $165 million to $225 million a year if hedge funds and private equity pay the unincorporated business tax on carried interest, the institute said.

The institute countered the idea that a tax change would diminish New York as the financial center of the world with the rationale that hedge funds would remain in the city because of its "unsurpassed attraction as a place to conduct business."

The city has 11 of the biggest private equity firms and 13 of the top-performing hedge funds, the study said. Hedge funds made between $20 billion and $39 billion, according to the study.