“They weren’t pillaging – they were financing.” Those are the words of longtime Hollywood eminence Michael Ovitz in his unputdownable new memoir, Who Is Michael Ovitz? Having morphed into an M&A specialist towards the end of his time at CAA, Ovitz was describing all the overdone hysteria about Japanese investment in the United States in the 1980s.
Crucial here is that Ovitz co-founded CAA, and so knew intimately the money worries that generally define life for most business founders. It’s a daily struggle for operating funds. More specifically, there’s no such thing as the “easy money” that economic pundits of all stripes so casually throw around. Most of the time access to cash is incredibly challenging. Looking back on surging capital inflows from Japan in the '80s, the faux patriots who lamented it despite there being no companies and no jobs without investment were plainly insulated from the realities of running a business. Ovitz wasn’t.
Which brings us to recent commentary from Fox News host Tucker Carlson on his eponymous show, Tucker Carlson Tonight. Among other things Carlson asked why investors (think hedge funds, private equity, venture capital, etc.) are taxed at lower rates than are typical workers. Carlson’s specific target was Mitt Romney. The junior Utah senator famously earned hundreds of millions while running private equity firm Bain Capital.
About Carlson’s objections, it says here that he knows better. Carlson is a longtime free thinker, and it’s hard to imagine he’s shifted so far to the left in such a short time. In that case it’s not unreasonable to assume Carlson recognizes that he presently sits in Bill O’Reilly’s proverbial chair. O'Reilly too had a tendency to inflame, and so Carlson perhaps does the same. TV is entertainment, or something like that. Whatever the answer, it’s worthwhile to answer his critique of investor compensation.
For one, it’s only natural that investors should take home the majority of investment profits relative to labor. Figure that investors are taking all the risk. While employees may work for a specific company for a week, a month, one year, or ten years, their employment during those years comes with pay. That’s not necessarily true for investors. Carlson knows this well as a co-founder of The Daily Caller. While the employees are paid no matter what, investor returns are most often a very distant object.
So many media concepts fail. That they do explains why investors are rewarded the most on the slim chance that there are actual returns. Those high returns are directly correlated with much higher odds that the investor will get little to nothing back, and likely lose money. Employees once again get paid no matter what.
All of this is good jumping off point to Carlson’s lament that workers pay income taxes, while a “private equity loophole” that enables capital gains treatment on investment income means people like Romney pay lower rates. On its face, the theory is incorrect. Per the Congressional Research Service, the average effective earned income tax rate is 25%. Notable here is that the long-term capital gains rate is 23.8 percent when we factor in the Affordable Care Act surcharge. So there’s really no difference in tax rates, but this truth obscures far more than it instructs.
Indeed, earned income is just that. It’s income that workers of all stripes expect to take home (short of company bankruptcy, or some other unexpected event). In short, it’s not at risk in the traditional sense. So while it’s shameful that private equity, other investors, and the very rich in general are expected to pay a lot more in taxes (for instance, 25% of $1M is much more than 25% of $50,000) than those who earn less, income is income. The previous point is merely offered up to remind readers that a flat rate of taxation is anything but. As opposed to something that favors the rich who pay the “same rate,” the reality is that it penalizes their enterprise. This includes wildly talented television hosts like Carlson. Never explained by class warriors is why people like Carlson should hand over more to the feds. Talk about self-defeating. Think about it: because Carlson’s talents are more highly valued by the markets than are those of most others, Nancy Pelosi, Mitch McConnell and Donald Trump should get more money to mis-allocate. Excessive taxation of the rich to foster “fairness” brings new meaning to non sequitur.
Yet I digress. The main point is that unlike income that is in a sense guaranteed, investment returns are not. Not even close. Whether it’s private equity, venture capital or hedge funds, partners in those funds only take home actual income on returns that exceed a contractually agreed to “high water mark.” Crucial here is that per Ken Fisher, the latter isn’t reset if a fund has a terrible year. This matters a great deal when we remember that one bad year can mean little to no investment income for the life of a fund. So while income for workers is at risk in the bankruptcy sense, investment income is consistently at risk given how difficult it is to allocate capital effectively. Simplifying what should be simple, investment income in the private equity, venture capital, and hedge fund space can be very handsome precisely because it’s so incredibly hard to attain in the first place.
Of course, the greater point here is that investment income shouldn’t be taxed at all. Lest we forget, there are quite simply no companies and no jobs without investment first. Carlson’s stance is one of bolstering the proverbial “little guy,” and since it is it’s worth stressing that the “little guy’s” job is an effect of investment. Plain and simple. For Carlson to attack investors, or for him to clamor for higher taxes on them, Carlson is rather unwittingly endorsing an increased cost (taxes are nothing but a price) placed on investment. Which is why his populist stance rates skepticism in the first place. It says here once again that Carlson doesn’t believe what he’s too wise – and experienced – to believe.
Indeed, Carlson yet again co-founded The Daily Caller. This rates prominent mention because he almost surely endured sleepless nights wondering how to make payroll at the online newspaper. He knows intimately well how crucial are risk-taking investors to the health of a business, and he also knows how much a business founder would give up (from an equity standpoint) in order to attain the operating funds without which a business goes under, and its employees hit the unemployment rolls.
So there it is. Carlson knows better. He does because he has common sense, but also because he’s almost certainly gone without sleep due to scarce capital himself. Carlson’s job is different now, and television to varying degrees is entertainment as previously mentioned. So he plays a role. It’s just hard to believe he actually believes this aspect of the role he’s playing. Tucker Carlson is way too experienced.