Is James Stewart Overly Emotional, or Simply Unaware?

Is James Stewart Overly Emotional, or Simply Unaware?
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Warren Buffett presently pays billions in federal taxes, but business writer James Stewart finds all of this unfair.  To be clear, Stewart thinks the tax code is slanted toward Buffett (and others like him) despite the billions Buffett hands over each year to the federal government.  In fairness to the New York Times columnist, his analysis is based on Buffett’s faux - and long ago discredited – lament that he pays a lower rate of tax on his income than does his secretary. 

Income is italicized up above simply because Buffett was engaging in a bit of rhetorical trickery that most quickly picked up on.  While his annual income is relatively low, Buffett is the 2nd richest American precisely because he’s a major shareholder in Berkshire Hathaway, a rather successful collection of blue-chip companies cobbled together by Buffett.  As a major owner of Berkshire, Buffett pays billions annually in taxes; the latter seemingly an inconvenient truth glossed over by the class warriors in our midst.  In Stewart’s case, maybe he just didn’t know. 

That Stewart might have simply been unaware is a safe assumption in consideration of a piece he wrote last week about the tax on carried interest.  If not, Stewart’s musings were a reminder that emotion is a not-very-reliable source of reasoned analysis.  In Stewart’s case, his surplus of feeling about taxation has deprived him of all nuance.  Or again, maybe he’s just unaware that “carried interest” has nothing to do with income.  One can hope.  Optimism is good. 

As Stewart put it, “There is no more glaring example of the House Republicans’ indifference to inequities embedded in the tax code than the treatment of so-called carried interest.  For decades, the carried interest provision has enabled wealthy private equity managers, hedge fund managers and real estate investors to pay the lower capital gains rate (20 percent, not counting the Obama health care surcharge of 3.8 percent) on their income rather than the rate on ordinary income (a maximum of 39.6 percent).”

Where does one begin? With brevity very much in mind it should once again be repeated that “carried interest” is not income.  While nothing in life is guaranteed, income is what we taken home every other week in the form of a paycheck.  The New York Times presumably pays Stewart an annual salary, and he pays federal income taxes on his salary. 

What’s important, however, is that carried interest “income” is hardly guaranteed in the way that Stewart’s annual income is, which may explain his latest column.  He once again didn’t know, or so it seems. 

Indeed, were Stewart a bit more attuned to what he was criticizing, he would know that most hedge funds fail.  If you’re very, very good as a trader you’ll be wrong nearly as often as you’re right. 

Stewart would also know that the batting average for private equity investments, whereby investors frequently direct precious capital to companies on the proverbial deathbed, is less than 50 percent.  Venture capital? It’s a known quantity that nine out of ten Silicon Valley start-ups fail. 

In short, if you're the recipient of carried interest “income,” it means you’ve succeeded where most haven’t.  There’s no income to speak of.  You only have carried interest “income” insofar as your investments do well enough that you not only meet a pre-set hurdle rate set by your investors, after which you exceed it. But as evidenced by how many hedge funds fail, and how many private equity and venture capital investments go bust, the odds of actually attaining carried interest “income” are very low.  That’s why the pay in all three is so handsome: few attain it. 

Applied to Stewart, the high pay enjoyed by the very few with the capabilities to succeed as investors should have presented itself as substantial evidence that all of this was never guaranteed “income.” If it were actually income, the pay for skilled investors would be a tiny fraction of what it presently is. Implicit in Stewart's naivete is that institutional investors are stupid, and easily duped by rapacious investors who are similarly skilled inside Washington’s corridors of power.  But as evidenced by the high aforementioned failure rate among hedge, private equity and VC funds, institutional investors are the opposite of stupid.  They pull the plug on the lousy performers, as in those who don’t achieve carried interest “income,” with great regularity. 

Which brings us to the 23.8 percent penalty levied on “income” that is anything but.  It’s a reminder that the lobbyists in the employ of hedge, private equity and VC funds don’t have nearly enough influence in Washington.  That’s the case simply because the tax levied on income that only reveals itself if one’s investments succeed should be zero.  That it should be zero is a statement of the obvious.  It is because companies and jobs are an effect of investment.  Always.  For Stewart to even intimate that economic opportunity can reveal itself sans investment would be for him to reveal himself as much worse than unaware, and instead dishonest. 

So if what’s true can be acknowledged, that companies and jobs are an effect of investment, we can then ask what is a basic question: why on earth would the federal tax code penalize the price-givers (hedge funds) whose intrepid investment signals to capital sources (private equity and VC funds, among others) where and where not to invest?  The more information the more investment that creates opportunity, yet the sources of crucial capital are penalized to the tune of 23.8 percent for their investment success despite the latter being an essential driver of economic advance.  And it gets worse.

While Stewart thinks it’s unfair that the investors without which there are no companies and no jobs get hit with a 23.8 percent tax when they invest rather skillfully, it’s hard to find any commentary from him about the tax treatment of municipal bonds and U.S. Treasuries.  In Stewart’s case, he plainly thinks that it’s a “loophole” when what’s not income isn’t taxed as income, but when investors subsidize waste, cronyism and wars through their purchases of U.S. Treasuries, not a word from Stewart about how owners of those income streams aren’t taxed locally, or by states.  He apparently loathes inequality, but has Stewart ever considered why members of Congress invariably stay in Washington long after their public service is over? They do because, thanks to endless federal spending subsidized by the tax code, there's lots of money to be made influencing where all the money taxed and borrowed by Congres goes.  

And what about municipal bonds? If you purchase them whereby you fund state and local spending, your income streams are exempt from local, state and federal taxes.  About this, the class warrior in  Stewart would be wise to ask the heads of Private Wealth at top firms like Goldman Sachs and Morgan Stanley if he can spend an afternoon at both.  If so, he’ll find that that the superrich are size buyers of these tax exempt entities.  There’s your loophole: if you support the spending of politicians rather than sleuthing the next Google, Microsoft or Nike, the tax code will reward you in a big way.  If you invest in progress and succeed, all the while creating endless opportunity among all income classes (is Stewart aware of the fight among cities for Amazon's 2nd headquarters?), you're penalized for it. Yet anger from the reliably emotional Stewart is hard to find.  Interesting.

One can hope that it’s all just a misunderstanding.  As speculated early on in this piece, James Stewart’s commentary about Warren Buffett and so-called carried interest “income” suggests that he simply doesn’t know.  Bad a policy compass as emotion is, it can’t possibly explain why Stewart so totally misreads what’s long been obvious to the mildly sentient. 

John Tamny is a speechwriter and writer of opinion pieces for clients, he's editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( His new book is The End of Work, about the exciting explosion of remunerative jobs that don't feel at all like work.  He's also the author of Who Needs the Fed? and Popular Economics. He can be reached at  

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