Robert Rubin's Rates

When the chairman of the executive committee of Citigroup, Robert Rubin, announced yesterday that he wants to more than double the taxes on the earnings of hedge fund managers, he was speaking in Washington, where he used to be Treasury Secretary, not in New York, where Citi is headquartered. The decision on where to make the remarks was probably the only smart thing about them — the idea of a giant tax increase on some of the most successful Americans could only be cheered in Washington, where it would give the politicians more money to spend.

Here in New York City, the idea is likely to meet a cooler reception, save for the New York Times, which on April 2 issued an editorial calling for an increase in taxes on private equity and buyout fund managers, who are compensated similarly to the hedge fund managers. Back then, in an editorial headlined "Private Equity and the Times," we likened it to the Detroit News coming out for higher taxes on cars or a newspaper in Iowa plumping for higher taxes on corn. Capital gains, in other words, are the hometown industry here in New York City, and this newspaper supports policies, such as low taxes, designed to spur them rather than deter them.

Even in Washington, though, Mr. Rubin's remarks, which were reported by Bloomberg News, must have generated some head-scratching. After all, President Clinton called him "the greatest secretary of the Treasury since Alexander Hamilton," yet while Mr. Rubin was serving as Treasury secretary between 1995 and 1999, raising taxes on hedge funds was an issue he did not tackle. On the contrary, it was on Mr. Rubin's watch at Treasury that President Clinton signed into law the Taxpayer Relief Act of 1997, which cut the tax rate on most capital gains to 20% from 28%. In signing the law, President Clinton said, "This legislation will not only provide needed tax relief for middle-class Americans, but will also encourage economic growth." The stock market soared amid a roaring economy.

So what could possibly account for the fact that, now that Mr. Rubin has safely returned to the private sector, he all of a sudden, as Bloomberg reports, thinks there is a "very good argument" for taxing the income of hedge fund and private equity managers as ordinary income, i.e., at a 35% rate that the Democrats would raise further, rather than at the capital gains rate, which was lowered under President Bush to 15% from 20%?

A cynic might see an elaborate plot by Mr. Rubin to destroy the hedge fund and private equity business, forcing wealthy investors and pension funds to settle for placing their assets in accounts at Citigroup's Smith Barney or Citi Private Bank businesses. But that's illogical — why would Mr. Rubin want to annoy these funds, which are active and lucrative clients of Citi's trading desks?

Maybe Mr. Rubin is succumbing to that oh-so-human emotion of envy, enlisting in the "war on prosperity" that is brewing among the ranks of the leading Democratic presidential contenders, who have announced they intend to raise taxes on all filers earning more than $200,000 a year. For this, one of the richest men in America, Warren Buffett, has announced his readiness to do what he can to help elect either Senator Clinton or Obama. Far be it from us to gainsay both the Sage of Omaha and Greatest Secretary of the Treasury since Hamilton, but hedge funds and private equity have powered New York's economy and America in countless ways, contributing plenty to the tax base and beyond that to the city's philanthropic causes.

The returns earned by many of them have been substantially better than that of the company Mr. Rubin helps lead, Citigroup, which in April announced it was cutting 17,000 jobs. Yesterday Citigroup won approval from the city 's Industrial Development Agency to avoid paying millions of dollars in sales taxes on supplies for a building in Long Island City, Queens. Not to put too fine a point on it, but while Mr. Rubin is agitating to raise federal taxes on those in the financial industry who are doing well, his own company is seeking to pay less taxes in New York.

Mr. Rubin is known to be admirer of President Kennedy (they both had their portraits painted by the great Aaron Shikler). Kennedy, in his December 14, 1962, address to the Economic Club of New York, spoke openly and without apology of "the advantages of the free enterprise system." He called not for tax increases but for tax cuts, and his tax cuts were targeted at those in the highest brackets. He brought top marginal rates way down. He said the right tax cuts "will in due course increase our gross national product by several times the amount of taxes actually cut. Profit margins will be improved, and both the incentive to invest and the supply of internal funds for investment will be increased. There will be new interest in taking risks, in increasing productivity, in creating new jobs and new products for long-term economic growth."

That the Democrats have been forsaking that logic is one reason why, in the past generation, so many Democrats went over to the Republicans. The investment and risks that Kennedy wanted to incentivize and reward, Mr. Rubin and his fellow Democrats now want to punish. It's an opportunity for the Republicans — or for a Democratic presidential candidate in this cycle to come to New York and give a speech on "the advantages of the free enterprise system," which are manifold, and can be seen each day in the vibrance and dynamism and prosperity of this city.