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In a recent interview on WISN’s UpFront with Mike Gousha, U.S. Sen. Tammy Baldwin talked about how the burden of college debt requires bipartisan action from Congress. But we’re not going to wait around to start talking about the solutions, she said. Baldwin then cited legislation she has introduced to close the so-called carried interest loophole, which allows the primary source of income for hedge fund managers to be taxed differently than others earning a similar amount. Hedge fund managers and others in private equity pay much lower (tax) rates on their income than do truck drivers and teachers and nurses, Baldwin said in the Feb. 14, 2016 interview. Outrageous. Last May, PolitiFact National checked a similar claim from Democratic presidential candidate Hillary Clinton: Hedge fund managers pay less in taxes than nurses and truck drivers. The claim was rated False, since the raw amount paid in taxes by hedge fund managers far exceeds that paid by nurses and truck drivers. Similarly, the tax rates paid would typically be higher as well. Baldwin’s claim is very similar to the one from Clinton. Does Baldwin fare any better? Carried interest The carried interest provision Baldwin referred to concerns the compensation of investment managers. Hedge fund managers oversee money from investors and are compensated with a cut of the profits. Their paycheck is typically determined according to a two and twenty formula -- that is, a 2 percent fee for all assets invested and 20 percent of profits earned. The fee on profits, called carried interest, serves as investment manager’s main source of income. The 20 percent cut is taxed as capital gains, rather than normal earnings, so those funds are subject to a lower rate -- 20 percent with surtaxes of 3.8 and 1.2 percent. Carried interest also isn’t subject to payroll taxes. Meanwhile, the income of the wealthiest Americans is taxed at the highest rate -- nearly 40 percent. The issue: Many hedge fund managers would otherwise fall into this group. Baldwin’s legislation, termed the Carried Interest Fairness Act of 2015, would tax these earnings at ordinary income tax rates. For all the talk, carried interest represents a very small portion of all employee compensation in the United States. Congress’ Joint Committee on Taxation estimates that ending the tax break would raise $1.32 billion this year and $15.64 billion over 10 years. This is just a drop in the bucket for the federal government, which collected about $1.5 trillion in income taxes in 2015. Baldwin’s claim We have checked a Baldwin claim about the tax break before. In September 2015, she said the pope and Donald Trump and Tammy Baldwin all agree on eliminating the carried-interest tax break. We rated the claim Half True. Trump, the Republican presidential front runner, does agree with Baldwin, but we could find no evidence of Pope Francis making a statement on ending the tax break. When we asked for backup for the claim that hedge fund managers pay much lower income tax rates than truck drivers and teachers and nurses, Baldwin’s staff simply pointed to the carried interest tax break. So that’s our starting point. As noted, the hedge fund manager’s cut of profits is taxed at around 25 percent when surtaxes are included. The average truck driver, meanwhile, would fall into the 15 percent tax bracket, while a well-compensated one may be taxed at 25 percent. Based on IRS salary figures, most nurses and teachers would be taxed at 25 percent of their income. However, thanks to various exemptions, deductions and credits, nearly all people pay a lower average tax than their tax bracket suggests. So what’s the average tax rate for truck drivers, teachers and nurses? According to 2015 figures from the Joint Committee on Taxation, an individual making between $75,000 and $100,000 -- which would typically be a high-end salary for the cited occupations -- would pay an average tax rate of 6 percent. To be sure, a lot of variation exists in the taxes paid, so it is possible that some truck drivers (or teachers or nurses) may pay a higher average tax rate than a hedge fund manager. But Baldwin was speaking in a broad sense, and our analysis looks at it that way, too. The truck driver will pay a lower percentage of income than will the hedge fund manager, said Roberton Williams of the Urban Institute-Brookings Institution Tax Policy Center. But the hedge fund manager pays a lot less tax than he or she would if the carried interest were considered income rather than capital gains. Indeed, the same Joint Committee on Taxation analysis found the highest earners -- people who make more than $500,000 a year and are taxed at nearly 40 percent on their last dollar earned -- typically face an average tax rate of 27.4 percent Of course, the hedge fund managers pay less, as previously noted, based on the nature of their income. Our rating Baldwin said hedge fund managers and others in private equity pay much lower (tax) rates on their income than do truck drivers and teachers and nurses. Based on the carried interest provisions, there could be some individual scenarios in which a truck driver would pay a larger portion of income than a hedge fund manager. But when looking at average tax rates -- the amount typically paid after deductions and exemptions -- a typical truck driver, teacher or nurse would pay a far smaller percentage of their income in taxes. We rate the claim False. https://www.sharethefacts.co/share/b299b6dd-d2b1-42dd-8a77-b502b5c6a581
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