Bill Gross of the bond investment firm Pimco is one of the top bond investors in the world. He recently made comments related to something Warren Buffett said about how the rich generally pay lower taxes than the middle class, detailed in this postto this post. These two investors' comments highlight the fact that some rich Americans are saying that the current tax system is penalizing the rich ... they are lying. Making sure the tax system is progressive is not a matter of punishing the rich. It is a matter of justice.
WASHINGTON (MarketWatch) -- He's no stranger to wealth himself, but Pimco chief investment officer Bill Gross clearly doesn't feel he's under assault in a "war on prosperity."
Gross, in his monthly market letter, dismissed claims by private-equity and hedge-fund managers and their champions who contend they would take it easy and produce less wealth if they were required to pay taxes on their share of fund profits at personal income tax rates, which run as high as 35%, rather than at the capital gains rate of 15%.
Instead, America's top earners are benefiting from a low tax burden that has allowed the wealthiest chunk of the populace to claim an ever-larger piece of the economic pie, Gross argued.
"Wealth has always gravitated toward those that take risk with other people's money but especially so when taxes are low," Gross wrote. "The rich are different -- but they are not necessarily society's paragons. It is in fact society's wind and its current willingness to nurture the rich that fills their sails," Gross wrote.
In most cases, general partners at hedge funds and private-equity funds receive a management fee equal to 2% of a fund's assets plus 20% of a fund's profits. The management fee is taxed as ordinary income. But the profit share, known as "carried interest," is taxed as investment income. If the fund's profits are in the form of a capital gain, then the fund manager's take is taxed at the capital gains rate, or 15%.
That's raised hackles on Capitol Hill, where critics argue that the carried interest share claimed by managers isn't a true capital gain since they don't have skin in the game themselves. Instead, they argue that the income is derived largely from managing financial investments, much like a mutual fund manager, whose salary is taxed as regular income. See archived story.
Defenders of the current tax treatment say the general partners are contributing "sweat equity" and should therefore remain eligible for the capital-gains treatment.
The Club for Growth, a Republican group that presses for low taxes, has dubbed the effort to change the tax code a "war on prosperity."
Efforts to boost the tax rate on carried interest would result in decreased innovation and productivity, undermining the nation's competitiveness in the global economy and lowering returns earned by universities, foundations and pension funds, argued Pat Toomey, the group's president.
But Gross says it's "farce" to give credence to assertions, such as those offered by Toomey, that managers would lack incentive to work hard if Congress "moves to raise their taxes up to levels paid by the majority of America's middle class."
More broadly, Gross echoes Warren Buffett, saying its "far better to admit" that the effective tax rate for the wealthiest Americans overall averages about 15% as a result of income derived largely from investments "while those of their salaried and therefore less-incented assistants just outside their office are nearly twice that."
A recent New York Times series showed the top 0.01% of earners -- the 14,588 families who made more than $9.5 million in 2005 -- had 5% of total income, a post-war peak. Gross said the figures show that it's time to begin thinking about redistribution of wealth.
"So when is enough, enough? Now is the time, long overdue in fact to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today's imbalances," Gross wrote.