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Elite Investment Clubs Account for Largest Share of Capital Gains

Posted by Andy Nicholas at Feb 27, 2012 05:35 PM |

Special access to high-end investment partnerships  -- such as hedge funds -- helps to explain why capital gains are so heavily concentrated among our nation’s richest few. Accordingly, a state capital gains tax would tap into the enormous profits generated by such exclusive investment clubs, generating roughly $700 million a year in new resources for investments in education, health care, and other core economic structures.

The ability to pool resources in exclusive investment partnerships helps to explain why 96 percent of capital gains go to millionaires.  The graph below shows that such high-end investment clubs were the single largest source (40 percent) of capital gains in 2007.

CapGains_byType

(Click graph to enlarge) 

Hedge funds, real estate investment trusts (REITs), and other elite investment partnerships allow a small group of wealthy investors to pool their resources in a single entity or club. A major advantage of this kind of financial arrangement is that the partnership gets special, dedicated access to money managers and investment experts – access that would be more difficult for individual investors to acquire. Money managers use their expertise to reinvest the partnership’s resources into stocks and other capital assets believed to have a high rate of return. Profits from the partnership’s investments are subsequently apportioned among or “passed through” to the individual investors.

House Bill 2563 would tap into profits from hedge funds and other elite investment partnerships to help rebuild our ailing education, health care, and public safety systems. Modeled on our proposal, the measure would bring Washington more in line with the 42 other states that tax capital gains by establishing a new 5 percent state excise tax on capital gains in excess of $10,000 each year. The tax would only impact about 2.4 percent of Washingtonians, but would do much to help build a more prosperous future for all Washingtonians.

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