Taxing...

If you've been reading the articles I've posted recently you've followed the basic premise that hedge funds and private equity funds pay 15% tax on their earnings as capital gains instead of 30-35% corporate tax rate everyone else pays. Ben Stein's article in NY Times last week talks about this. Remember, Ben Stein worked for Nixon, he's a conservative, for the most part. Now, my former senator Chuck Shumer from New York thinks this is o.k. This is the same man who goes after the Bush Administration for cutting taxes for the rich. Read this article in the NY Times, In Opposing Tax Plan, Schumer Breaks with Party.

But in the case of the tax proposals, the strategy behind Mr. Schumer’s efforts is putting to the test another set of principles he is known for. He has regularly portrayed himself as a progressive politician who identifies with the struggles of the middle class and is sharply critical of the selfish “plutocrats” who he says control the Republican Party.

And he has written a book on the subject, advising policy makers to follow his strategy of deciding positions by identifying with the concerns of people like the Baileys, a fictional middle-class family from Long Island that he uses as a guide.

Now, leaders in his party are using similar language to justify their efforts to raise taxes on hedge funds and private equity firms, saying the new revenues will help pay for health and education programs and begin to reduce the impact of the alternative minimum tax on the middle class. The proposals have gained momentum in recent weeks but face formidable political obstacles, primarily in the Senate.

...

In June, senior House Democrats separately proposed raising the tax rate on the investment gains of fund managers — known as “carried interest” — to the ordinary income tax rate of as much as 35 percent, from the capital gains rate of 15 percent.

Win Ben Stein's Money

Good article in today's New York Times.

LET’S start with the obvious. Hedge funds have created a terribly wealthy new class. Although the data is overwhelming that the mass of hedge funds have not been outperforming the market after fees, money still pours into them. This has often made their proprietors terribly rich.

Somehow, by some alchemy of brilliant tax lawyers, these people are paying long-term capital gains rates of 15 percent on their compensation (even though much of their pay is tied to trades with holding periods that last seconds). Doctors and lawyers and writers and actors pay about two times that amount.

And you thought big oil was evil...

... try looking into hedge funds, private equity.

So, I work for big oil and was feeling guilty about it as I drove to work listening to my "liberal hippy" station that plays good music but today was playing an oil war song and a "puff there goes the ozone layer" song. Then I arrived at work and read this in the NY Times: Tax Loopholes Sweeten a Deal for Blackstone. Basically, they get to pay 15% taxes on 3.7 billion raised through selling stock when they went public and then turn around and take a 30% deduction on that same money. Read the article, slowly, it's confusing. See some quotes below.

Blackstone’s tax maneuver hinges on its use of good will, an accounting term for the value of the intangible assets, like a well-known brand name, that are built up by a company over time. That value is part of the reason a company is worth more than the sum of its physical parts, like buildings and equipment.

Individuals who create good will cannot deduct it. But when good will is sold the new owners can because its value is assumed to erode. The Blackstone partners sold the good will from their left pocket to their right.

In simplest terms, the Blackstone partners paid a 15 percent capital gains rate on the shares they sold last month in the initial stock offering to outside investors (those shares represented a stake in the Blackstone management company, not its funds).

Blackstone then arranged to get deductions for itself for the $3.7 billion worth of good will at a 35 percent rate. This is a twist on the “buy low, sell high” stock market adage; in this case it would be “tax low, deduct high.”

More...

The tax maneuver starts with Blackstone partners selling to a newly created subsidiary corporation $3.7 billion worth of good will. Such entities are known within the tax trade as blocker corporations, because they help block taxes from reaching the Treasury.

Here is how the structure works: Blackstone can deduct 35 percent, based on the corporate tax rate for depreciation, of the value of $3.7 billion in good will, or $1.3 billion. Because the partners told investors they have the right to 85 percent of that amount, that means they have $1.1 billion worth of deductions.

That amount would be saved over 15 years. But for an apples-to-apples comparison with the taxes it pays on the proceeds this year, the value of $1.1 billion in today’s dollars is $751 million.

How is this legal?

Baseball Half Way Point

Now that we have reached the All-Star Game, let's look at the moves the Astros did and didn't make.

First, the big trade. The Astros sent Willie Taveras, Taylor Buckholtz, and Jason Hirsh to the Rockies for Jason Jennings. Hirsh at the time was the Astros #1 pitching prospect. Jennings in 10 starts is 1-4 with a 4.07 ERA. Hirsh in 17 starts is 4-7 with a 4.90 ERA. Buckholtz in 7 starts is 3-4 with a 4.65 ERA and has pitched out of the bullpen. Willie T is hitting .325 with 20 steals. The rap on him was lack of power and he doesn't walk. He has 16 walks for the year for a OBP of .371 and he is slugging .391 with 13 extra base hits. The guy the Astros replaced Willie T with in centerfield, Hunter Pence is currently leading the NL in batting, hitting .342 with 11 homeruns and 42 RBI's. He is slugging .589 and has 10 walks.

Now the moves the Astros didn't make, the two guys pitching for the NY Yankees. Andy Pettitte in 18 starts is 4-6 with a 4.25 ERA. He has pitched 112 innings and pitched good early, but seems to be in a bit of a slump. Roger Clemens in 6 starts is 2-3 with a 3.63 ERA and has only given up 2 runs in his last two starts.

UPDATE: Carlos Beltran, all-star, is hitting .265 with 16 HR and 55 RBI's. He is really struggling now though. That is the non-deal from 3 years ago.

My opinion? I think the Rockie trade was bad, as Jennings is a free agent at the end of the season, and while Hunter is great, both Hunter and Pence would be better. Pettitte is getting old, and I don't think his second half will be much better. Clemens seems to have hit his stride, but we'll see how he holds up. Those two I don't miss.

Now, the Astros need to start trading guys to restock, and make a run in a few years again. Rebuilding time, Astros.