Close tax loopholes for billionaires? A billionaire responds.

Democrats want to raise the capital gains tax for hedge funds and private equity managers, but the tax break should remain for individual investors, billionaire Paul Allen argues.

The following from David Postman, who says he’s writing for Paul Allen:

“I work for Paul Allen. I’m writing to point out errors in your recent piece, ‘Closing Tax Loopholes for Billionaires.’ It is absolutely incorrect to say that Mr. Allen is ‘opposed to closing a tax loophole that allows hedge-fund and private equity managers to treat their earnings as capital gains.’”

“We have asked lawmakers to clarify their intent of the proposed language to make clear that it does not include individual investors like Mr. Allen, who are purely investing, not offering advice or management services. Democrats have been clear that they did not intend to include individual investors. We believe that individual investors - not hedge funds or private equity — should be able to continue to receive capital gains investment treatment.”

My apologies to Mr. Allen if I misstated his purpose in seeking to influence pending legislation. Evidently his only goal is to continue to pay 15 percent of his earnings in federal taxes on the grounds that he is an investor rather than an advisor.

Forgive me, though, if I still have doubts about the wisdom of treating his earnings this way. One of the most basic principles of taxation is known as “tax equity,” whereby two people drawing the same income should be treated the same for tax purposes.

Assume that Mr. Allen earns $200 million this year from his investments. (This is a conservative estimate since Mr. Allen’s personal wealth is estimated to be $13.5 billion, with earnings also from Vulcan Inc., his private asset management company, and a multi-billion dollar investment portfolio including stakes in Digeo, Kiha Software, real estate holdings, and more than 40 other technology, media, and content companies. Allen also owns three professional sports teams: the Seattle Seahawks of the National Football League, the Portland Trail Blazers of the National Basketball Association, and the Seattle Sounders FC franchise in Major League Soccer.)

Mr. Allen evidently believes most or all of this income should be taxed at 15 percent.

But suppose a high-tech entrepreneur (as Mr. Allen used to be) earns $200 million in income this year from a $10 million salary and $190 million bonus. The salary and bonus would be treated as ordinary income and subject to a marginal income tax of about 38 percent.

This would seem to violate the principle of tax equity.

Of course the moment we we tax capital gains at a lower rate than ordinary income we invite these sorts of inequities. More to the point, we also invite games through which wealthy people and their clever tax attornies try to dress up their earnings as capital gains rather than income.

So maybe the lesson here is we should go back to 1987 and treat income and capital gains the same.

Or the lesson is that any amount of earnings over a certain level — say, $1 million a year — should be irrebutably presumed to be income, subject to the tax rate on ordinary income.

Or maybe the real lesson here — given that median wages are going nowhere, public services are being cut, and America is going ever deeper into debt — is we need a more progressive income tax covering earnings from any and all sources, so that someone receiving $200 million a year (regardless of whether it’s attributed to salary or bonus or capital gains) has to pay a marginal rate of 50 percent. Or more.

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