(Gripping the ball with fervor.)

I’ll uh, do my best…

So, here’s an ordinary taxpayer who would be paying their taxes every year.

And you know the rules about not running with the ball. Not skipping out on your annual taxes. Taxes, 2024! (ball bounce) 2025! (bounce) 2026! (bounce).

Whereas… (KATHRYN stops bouncing and holds the ball close to her chest.) 

If I’m a hedge-fund manager I am basically running with it.

(Running without bouncing the ball, calling out passing years) 

2024, nope! 2025, nope!  2026, nope! 

(Stopping abruptly, then bouncing the ball a single time.) 

Yup, that was a bounce. If I hold an asset for at least three years, the interest on it is not considered income. Then, it qualifies as capital. I’ll be taxed at a lower tax rate. 

Uh… how did I do? Okay, carried interest is considered a return on investment and taxed as a capital gain rather than ordinary income, usually at a lower rate. 

What’s capital? Oh. Uh. Ok. 

(Pausing to consider the options.)

OKAY, so, evidently this is going to be a contortionist act.

RINGMASTER 

(Handing KATHRYN  a mat in exchange for the ball. )

Now, Kathryn will ditch the ball and wow us with her agility through the twists and turns of special taxation for the wealthy.

As KATHRYN assumes an awkward yoga pose,  RINGMASTER signals applause.

KATHRYN

Well, if you’re a hedge-fund manager or private equity fund manager or manager in venture capital, you work. Yeah, I would say despite the advantages you get, what you do qualifies as work. And you might profit on fees, interest, royalties, long- or short-term capital gains, and dividends, above and beyond that hard work you do. Yeah, I know. The word gains trips me up.  

(Changing to another weird yoga-like pose).

RINGMASTER

And ladies and gentlemen, will you look at that uh… pliancy!

(Signaling applause)

KATHRYN

So, the IRS defines income: Earned income is the money you make in salary, wages, commissions, or tips. Investment income is money you make selling something for more than you paid for it. Passive income is money you make from something you own, without selling it.  

But how is it taxed? Gains, that is, what you passively rake in from assets held for a year or less are called short-term capital gains, and they generally are taxed at the same rate as your ordinary income, anywhere from 10% to 37%. I know, it gets confusing. 

(Changing pose)

Yeah, I know, the word assets also tripped me up. Assets can be physical or intangible. And yes, an investment is considered an asset. Anyhow, gains, that is, what accrues from the assets you’ve held for longer than a year are known as long-term capital gains, and they are typically taxed at lower rates than short-term gains and ordinary income. Capital gains  can apply to almost any investment that is sold at a profit, such as stocks, bonds, real estate, precious metals, options contracts, or  even cryptocurrency. And as I said, investments are assets. I know, I know… the word capital… phew, backing up…  don’t get too far into the twists and turns of the rules.  Unless you are in the 1%. Then you just hire a bunch of lawyers to parse out the rules while you chill.   If you are wealthy, there is no rule that can’t be bent.

(Changing pose.)

So, say you made interest on an investment and sold it. They would call it the  sale of an asset, and it would be considered a capital gain. If you held the investment  for more than a year, there’s a special tax loophole just for you. It’s called… carried interest.

Basically, you get taxed at a special rate. The managers pay a federal personal income tax on these gains which is capped  at a rate of 23.8 percent.

And what do ordinary taxpayers pay? Up to 37 percent. 

Oh, and if you are wealthy enough to invest, there’s hardly a way to lose. If your investments end up losing money rather than generating gains, you can typically use those losses to reduce your taxes. Bankruptcy has gotten harder for individuals and easier for corporations. We see Apple not even owing taxes. Of course there are also the tax havens. 

RINGMASTER 

Who would guess a human mind could be directed to understand such things!

(Signaling applause from the audience.)

RINGMASTER

What? You haven’t gotten it? Who can blame us. Yes, maybe this one is for IVY.

IVY

(Putting on the clown nose, bending over to expose her bloomers).

Let’s cut to the chase. This is one hundred percent a clown act. Why should Americans have to bend over backwards for these contortions. What the IRS is essentially saying, is that your toil and labor isn’t treated the same way passive income is. Value extraction is rewarded. So, if you work hard, you get taxed hard. You are a rich parasite, you get a special deal? The IRS requires five hundred hours of so called material participation, meaning a hedge-fund manager, for example would have to show at least some sweat equity. But here’s the joke. 500 hours amounts to 12 days of labor. And we’re talking huge amounts here.