I get tired constantly repeating myself to my fine friends who are on the Left side of the political spectrum when it comes to economic, fiscal, and business realities.  It’s not their fault.  I used to be the same way.  However, following up on a good article about economics for dummies, I thought I’d add some basic concepts that everyone should understand — regardless of political beliefs.

This stuff isn’t that hard to understand.  My old high school math teacher would just drill me over and over on something until I got it.

Risk, Reward, and Investment

A rich person makes all his income, more than $250,000 each year, from investment income only.

Investment involves taking a risk.  In exchange for that risk, an investor is rewarded.  The greater the risk, the greater the reward.

Imagine two cups.  Under one is a dollar.  You bet one dollar and choose one cup.   The odds of picking the right cup are 1-1.  If you are right, you win one dollar.

Imagine ten cups.  Under one cup is ten dollars.  You bet one dollar but choose only one cup.  The risk of choosing the right cup has gone up to 9-1 against you.   Don’t you think you deserve a higher reward for choosing that one right cup?

If you don’t think so, I have a bridge I’d like to sell you.

Investment works the same way.

(more…)

The debt negotiations raging on in Washington have given Democrats a rare chance to do two of their favorite things at once: (1) Blame straw men for the problem, and (2) Declare class warfare and bloviate about the need for higher taxes on “the rich.”

In their desperate effort to find a way to increase revenue without having to make real spending cuts, Congressional Democrats are mining the tax code for quick fixes. Now, there are some things they could do that would make sense, like tackling federal subsidies and tax credits that involve the government picking winners and losers in the private sector, but those actions would make too much sense and could hurt them politically. So, they are regurgitating a previously failed idea that would do severe damage to the U.S. economy under the guise of “closing a loophole.”

Carried interest refers to the share of investment profits allocated to the manager of a private equity fund. Carried interest is not the manager’s primary compensation for managing the fund; rather it is an additional, investment-based sum, which the tax code classifies as a capital gain. Capital gains are taxed at a lower rate of 15 percent, as they are the fruit of risk-laden investments and not primary sources of income.

Liberals in Congress, realizing that ‘investment fund managers’ are not a very sympathetic-sounding group to the majority of Americans, have sensed an opportunity to paint a straightforward part of the tax code as a loophole benefiting the afore-mentioned evil straw men.

(more…)

Had Mario Puzo ever collaborated with George Orwell, one might easily imagine a sinister or otherwise shadowy character brandishing the honorific, “The Intellectual Godfather of Private Equity Tax Hikes.” Sadly, the genius of these two novelists is unnecessary in a world run by Barack Obama, Nancy Pelosi and Harry Reid. Meet the all too real Victor Fleischer who is indeed “sometimes called the Intellectual Godfather of Private Equity Tax Hikes.” The story of his quest for academic tenure is as frightening a plot as any work of fiction.

In 2007, Fleischer authored a paper titled, “Two and Twenty: Taxing Partnership Profits in Private Equity Funds,” in which he argued that private equity managers had taken advantage of a “loophole” in the tax code to [gasp!] make some money. As Fleischer has said, “It was stunning to me that you had some of the wealthiest people in the country paying a low rate on their labor income.”

Of course, private equity managers are the black-hatted proxy for most partnerships under the tax code, including real estate partnerships and even many “mom and pop” shops. And by “loophole in the tax code,” one can easily conclude Fleischer simply refers a feature of the tax code he doesn’t like because it allows people to “pay a low rate.”

Nevertheless, this isn’t a story about an egghead who wrote a paper that was well received within the brick and mahogany walls of higher education. No, our plot takes a dark turn when Mr. Fleischer’s paper, “landed with some Congressional staff members, who were looking for ways to pay for a rollback in the alternative minimum tax.”

“In 2007, a draft version of my paper on carried interest helped prompt Congress to propose Section 701 of the tax code, which would tax a portion of carried interest as ordinary income rather than a capital gain,” boasted Fleischer on his blog, which he calls – get this – A Taxing Blog. Despite aggressive efforts on the part of many liberal members who have been inspired by Mr. Fleischer’s paper, however, Congress has yet to pass this massive jobs-killing tax increase, which Larry Kudlow has labeled “a war on prosperity.”

(more…)

From the great folks at Sen. Tom Coburn’s office:

Political scientists lobbying Congress for federal subsidies

The National Science Foundation spends about $8 million annually to support political science research

Research sponsored by the National Science Foundation and the U.S. Air Force attempts to predict individuals’ political affiliation based on Facebook profiles

Congress earmarks $3 million to a company owned by Goldman Sachs and two private equity funds

Congress raids the military’s maintenance budget to pay for $5 million earmark for digital scrapbooks

The Federal Aviation Administration has spent more than $270 million in federal stimulus grants on projects that scored poorly on the agency’s own national priority rating system

Department of Homeland Security steers nearly $1 million in federal funding, typically distributed to fire departments, to ACORN