Hedge Fund Managers’ Tax Rates

Hedge Fund Managers’ Tax Rates



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Sen. Bernie Sanders says firefighters, police officers, nurses and truck drivers all pay higher effective tax rates than hedge fund managers. That’s accurate for some in those occupations, but it’s not the case across the board.

Single firefighters, police officers and nurses who earn the median salary in those middle-class-sounding jobs, and with no children and standard income tax deductions, would pay higher effective tax rates than hedge fund managers, once we factor in payroll taxes. But a single truck driver earning the median salary would pay a slightly lower rate than the typical hedge fund manager. And once we consider other hypothetical situations — adding in a dependent child, or a nonworking spouse, or both — the hedge fund manager pays a higher effective rate than the other occupations at the median pay level.

If our firefighters, police officers, nurses and truck drivers earned some of the top salaries for their professions, they would pay a higher effective tax rate than our hedge fund manager. That’s still the case for all except the truck driver if they had one dependent child and filed as head of household.

Sanders has a point that some in the professions he cites would pay higher effective tax rates — once we factor in payroll taxes — than what a hedge fund manager (or someone who earns money through investments rather than wages) might pay. He’s objecting to the ability of those who manage investments for a living to pay capital gains tax rates, which are lower than most marginal income tax rates and substantially lower than the top income tax rate.

This issue was highlighted by investor Warren Buffett, CEO of Berkshire Hathaway, in 2011, when he said that he paid a lower effective tax rate than the other workers in his office. Back then, the top capital gains rate was only 15 percent — it’s now 20 percent — but people who “make money with money,” as Buffett put it, can still pay lower effective tax rates than those who make their money through payroll jobs. It depends, however, on an individual’s circumstances, as we’ll show.