Actually, from what Luskin said, hedge funds could’ve saved communism.

Capital losses only offset capital gains, not because of the rate difference, but because of the opportunity for deferral. For example, suppose you bought a stock and also shorted it. At the end of the year, one of those positions will be in a loss, but it will be perfectly offset by the gain position, leaving you flat. If you could deduct capital losses from ordinary income, you could close out the loss position, offset it against ordinary income, and pay less tax, even though you have no net change in you economic position. Sure you would have to pay when you close out the gain position, but who knows when that might be.

KCinDC: “What exactly is in the category “things you’d do for $500 million that you wouldn’t do for $400 million”?”

Critical to Victory Over Islamocommunistic Terror.

But there’s is just as much an argument that the business expense deduction distorts efficient capital allocation as low capital gains tax.

The arguments that capital gains should be taxed equivalent to income should really be that capital gains are income for many people.

They are both ways that firms manage rich people’s money, but they are different methods. Hedge funds generally use investors’ money (often provided by other managed funds) to borrow more money and invest it in stocks in proprietary strategies. Private equity funds generally use investors’ money to acquire (significant shares in) companies. This sometimes has the effect of taking them private but it’s not necessary: PE can own a chunk of a company in exactly the same way any shareholder will. The big difference is that a hedge fund will hold a wider basket of shares, rarely if ever a significant proportion of any one company.

The two types of funds will tend to invest in companies for different reasons. Hedge funds tend to look for companies that are undervalued by the market (so that if you hold shares in them, when the market catches up, as it will, you make a bundle) or make plays based on timing, that kind of thing. PE funds look to buy companies that are misshapen in some way, for instance, have lossmaking areas that can be hived off, repackaged and sold, leaving a profitmaking company that can be sold at a big markup.

Realistically, only hedge funds can claim to increase market liquidity (because they trade in and out of shares, buying and selling a large volume of them), so the argument Luskin makes
only really applies to them.

Analysts believe this kind of a pattern is bad for the market — and should be discounted. Hedge funds now account for half the daily volume on the New York Stock Exchange, with average volume this week running about 2 billion shares.

if we raise taxes on hedge fund managers we’ll get fewer hedge fund managers.

What exactly is in the category “things you’d do for $500 million that you wouldn’t do for $400 million”?

I lost the same battle with regard to Monsoons here a week or so ago.

I assume that Luskin is talking about the same basic thing, but confess that I can only hazard vague guesses as to the subtleties of “hedge fund guy” vs. “private equity guy”. Particularly in contrast to the crystal green clarity of my envious fury at “People making $600 million a year are cheating.” But at least I get to be righteous about it in blog comments, that’s worth something, right … right?

Isn’t this why capital losses can only offset capital gains?