Confiscatory taxation… could be a good idea!

What is a “hedge fund?” The ‘pedia says:

While there is no legal definition for “hedge fund” under U.S. securities laws and regulations, typically they include any investment fund that, because of an exemption from certain regulation that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and risky investments than a public fund might.

Hedge funds can be technically complicated and abstract. They often invest in “derivatives.” Derivatives are synthetic speculative investments with a payoff based on shifts in market conditions.

Since hedge funds are typically unregulated, incredibly risky margin positions often occur. In 1929 unregulated margins were an accelerating factor in the market collapse. Hedge funds, investment schemes outside of the regulatory environment, have put all of us at risk of a market collapse today. So when people talk about the risk/reward ratio associated with investment in a hedge fund, they are talking about the risk tolerance of the private investor. Nothing is implied regarding the risks to the community at large. Yet, in the case of hedge fund failures, lenders can lose billions and these losses are written off against their income. To the extent that the income would have been taxable, the entire community took the ride when the hedge monkey bought his ticket.

Where does the money go? A lot of it might end up in the hands of companies that were happy to sell shares for dollars, unconcerned about the provenance of those dollars. A lot of it ends up in the bank accounts of the hedge fund managers. In a good year, a hedge fund manager can earn tens of millions. In a bad year, he can go belly-up bankrupt.

What if we put a cap on earnings for hedge fund managers? What if we suggested that a million bucks a year should be sufficient for what is after all a fairly routine and boring gig, a sales job with a lot of paperwork required? What if we said a million bucks a year is sufficient for anyone, everyone? Rush Limbaugh might complain, and Dick Cheney> What if we said that earnings beyond the cap belonged to the government, to be used for general fund expenses?

I imagine that a lot of high earners would cry “foul,” but so what? Are we supposed to feel sorry for a hedge fund manager who will no longer be earning two million dollar year-end bonuses? Will the supply of eager young MBAs dry up if there’s a million dollar annual cap? Of course not.

So let’s take a closer look at who makes what and tax the pants off the high earners. How many Maybachs does Rush Limbaugh need anyway?

Technorati Tags: derivatives, high margins, gambling with other people’s money, risks, rewards, taxes, free health care for everyone