Tax bedfellows: Bush & Trump echo Sanders & Clinton on hedge funds | McClatchy Washington Bureau

They are shaping up to be one of THE bipartisan targets of the 2016 presidential campaign.

“The new normal is a comfortable ride for affluent people living on their portfolios,” says Republican Jeb Bush.

“Getting away with murder,” says Republican Donald Trump.

They’re not alone. Democrats Hillary Clinton and Bernie Sanders have a similar idea.

The thought catching their fancy: that the wealthy are getting away with lower taxes than they should on private equity funds and hedge funds. Long debated, the idea is particularly catching hold this campaign as both major parties grapple with a growing gap between rich and poor and forge their own solutions to close that chasm.

One proposal is to increase taxes on the profits made by investments in things such as hedge funds and private equity firms, out of reach for most ordinary folks and a mystery to most Americans.

Bush this week rolled out the most specific proposal of the new campaign, saying wealth investors should pay the same rate of taxes on those investments as people pay on their paychecks.

A major issue is a part of the tax code that allows some managers of investment funds to be taxed at the rate of taxes on investment gains vs. the rate most Americans pay on their wages. It’s a debate that’s existed since the inception of the U.S. income tax in 1913.

The overarching question is whether its fair to tax income earned through the fruits of one’s labor at a higher rate than capital that’s been put to work in financial markets.

Private equity was a big problem for 2012 GOP nominee and multimillionaire Mitt Romney. He was co-founder of the private equity firm Bain Capital, which helped pioneer the lower tax structure. Romney was pilloried by his fellow Republicans during the primaries, and later by President Barack Obama, for his tax breaks.

Hedge funds are sophisticated investment vehicles for the uber wealthy that usually require a minimum investment of $100,000 or more. They’re for people who can afford the big risks implied when these funds seek the big profits, called an alpha return. There are about 10,000 active hedge funds in the $2 trillion industry.

The tax provision in question is called “carried interest.” It’s a generous loophole affecting the compensation structure for limited partnerships, ranging from real estate to law. It also happens to handsomely benefit managers of most private-equity firms and some hedge funds.

Managers in these sorts of partnerships typically earn a management fee equal to 2 percent of the value of investments, irrespective of performance. The management fee is taxed as ordinary income, presumably at the highest rates.

The twist comes from the manager’s 20 percent share of profits. For gains made in a period over a year or longer, these profits are taxed at nearly half the rate of what workers are taxed.

It means this: A private-equity fund manager might pay 23.8 percent tax on his compensation as a share of share of the profits. So if his share of profits is $1 million, his tax bill would be $200,000 instead of $396,000 at the top rate for ordinary income.

Democrats have railed against the carried-interest provisions for almost a decade, but they did not change them when they controlled Congress. Billionaire investor Warren Buffett has criticized the structure and wants it to end.

Obama proposed in his 2016 budget raising taxes on investment income to 28 percent for the top 1 percent of taxpayers. Clinton, as part of her economic plan, proposes rewarding investments held for longer periods of time with lower rates and penalizing wealthier Americans who take short-term profits. Her son-in-law, Marc Mezvinsky, co-founded the hedge fund Eaglevale Partners LP, which has bet heavily on the performance of bonds issued by the flailing Greek government.

When Congress first created income taxes, capital gains were treated as ordinary income – on par with wages. But since 1921 there has only been a four-year stretch – from 1987 to 1991 – that capital gains have been taxed at the same rate as income from work.