[ashwinaj]

I wonder which group of people lobbied for capital gains to be taxed lower than ordinary income? Is it coincidence that since the law (one of Reagan's tax cuts) was passed a lot of executives are paid a lower base salary and tons of stock options?

I'd consider that a fancy trick :)

EDIT: To answer harryh: Yes and it has been steadily decreasing [1]. And your point is? I think we can agree this mainly benefits the rich; I don't see someone in the middle class would have the discretionary income (not 401k, I'm talking about leftover income after expenses) to put his/her money in massive amounts stocks.

[1] http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...

[harryh]

Capital gains taxes have almost always been lower than ordinary income taxes. This is not a new post-Reagan phenomenon.

[drumdance]

The rate was much higher pre-Reagan, nearly double what it is today.

Also, the rise of finance means a lot of Wall Street hedge fund managers who should be paying ordinary income tax are paying cap gains rates through the carried interest exception. Venture capitalists too.

http://avc.com/2010/05/why-taxing-carried-interest-as-ordina...

[harryh]

Reagan lowered max cap gains rates from 39% down to 20% but then back up to 28%. At the same time he lowered the max rate on ordinary income from 70% down to 50% then down to 28%. So ya, at the end their they were briefly the same (which is why I used the word almost). But in general my point stands. Capital gains rates are generally lower than ordinary income rates as a matter of public policy.

A similar point holds for the carried interest rule. Those taking advantage of it aren't doing so because they've hired amazing accountants to file their taxes. They're just following relatively straight forward tax law.

Adjacently, while I generally agree with you on the topic of carried interest I did find this column thought provoking. You might enjoy it.

http://www.nytimes.com/2012/03/04/business/capital-gains-vs-...

[drumdance]

My understanding is that the carried interest rule was originally created as an incentive for mining exploration. It wasn't until the 80s that Wall Street hedged funds started taking off, and that they really started making use of it.

My feeling is, if you don't have actual capital at risk, you shouldn't get a break. Or put another way, if it's not possible for you to experience a capital loss, then it's not possible to experience a capital gain. Most VCs and hedge funds also invest a substantial amount of their own capital in the funds they manage, so it's not like it would be a radical change.

A few years ago I went to the Aspen Ideas Festival. One of the speakers was David Rubinstein of the Carlyle Group. Someone cheekily asked him what the tax on carried interest should be. He said "It should be zero. But politicians 'earn' so much money in donations by by threatening to repeal it, I predict it will always come up as an issue every three or four years, and will always stay about what it is now."

[harryh]

I generally agree with you about risk, though the counter argument is that they are putting capital at risk. They are taking some portion of their compensation as equity that may or may not turn out to have any value. It might not be actual dollars coming out of a bank account but the risk is still there.

Incidentally, since this is HN, one might ask if startup employees are doing the same thing to which I would generally nod and agree with you.

[walshemj]

And it makes sense as there would be no incentive to invest in business if you are taxed the same on T Bills, Bonds Consols, Guits etc