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Kass: Addressing the Fiscal Cliff

Perhaps before considering raising taxes on either the middle or even the upper class of U.S. wage earners, an explosive device should be detonated in order to destroy the rules that form the foundation of the ignominious Ugland House.

Tax what the large corporations burn, not what they earn, by getting rid of the shell game operated in the Ugland House in the Cayman Islands and elsewhere.

Citizens for Tax Justice estimates that tax havens in the Cayman Islands and elsewhere outside of the U.S. cost our government about $100 billion per year in tax receipts. Many of my hedge fund friends will no doubt push back from the notion of abolishing overseas tax havens, but we are entering a period of shared sacrifice in the four years ahead. Our legislators have hard decisions to make in reducing the country's budget deficit, but this seems one of the easier decisions.

There is an additional concern that is being addressed in Washington, D.C.: the notion of carried interest.

Carried interest is generally treated (preferentially) as capital gains in hedge fund and private-equity partnerships. The taxation of carried interest has been an issue for several years as the compensation earned by investors increased with the size of private-equity funds and hedge funds. Since private-equity firms tend to hold investments long term, the gains qualify as long-term capital gains, which have favorable tax treatment. Managers taking advantage of the maximum 15% tax rate on long-term capital gains have raised concerns. The view that managers are taking advantage of tax loopholes to receive what is comparably a salary without paying the ordinary 35% marginal tax rate is not sitting well with members of Congress nor their constituents. Taxing the gains at the marginal tax rate has drawn ire of several managers on Wall Street, but the move is necessary if Congress is going to close the tax loophole to address our country's budget issues.

After dealing with numerous other tax loopholes, our leaders in Washington, D.C., can begin to seriously address the enormous systemic waste that has been built up over the years in the bulging bureaucracy of our government.

Now there is some serious and heavy lifting!

At the time of publication, Kass and/or his funds had no positions in the stocks metioned, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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