The Younger Wealthy’s Alternative Approach to Investments Doesn’t Extend to Taxation

Enormously rich people tend to get bored easily, especially those on the younger side. Stocks and bonds, such a yawn. Wealthy Baby Boomers certainly do still get a kick out of watching their financial portfolios fatten. But their Millennial and Generation Z counterparts have an added expectation. The fortunes they’re investing, they’re expecting, will be filling their lives up with fun.

And what could be more fun than collecting classic cars! The ageless-auto “alternative asset class,” the Knight Frank Luxury Investment Index documents, has nearly tripled in value over the past decade. And investors in classic cars can even get to drive their investments!

Private equity fund managers, not surprisingly, are plugging themselves into this classic car frenzy. They’re doing their best to make investing in classic cars an effortless pleasure. Wealthy car collectors, thanks to their efforts, no longer need to bother checking under the hood of classic Bugattis and Ferraris. Private equity firms will arrange all that tiresome checking for them.

Billionaire and billionaire-wannabe fund execs are shelling out much more than ever before on candidates they’re counting on to keep our tax code rich people-friendly.

These private equity firms, notes auto analyst Benjamin Hunting, are buying up veritable fleets of fine autos they see as likely to appreciate strikingly over time, then offering deep pockets an opportunity to invest in these collections of classics. In return for providing this opportunity, private equity execs typically collect a 2% annual service fee and then claim 20% of the profits the sale of the cars eventually produces.

The classic car-loving investors, meanwhile, get to share the rest of the profits, on top of the joy rides some of the classic car funds invite them to take in their “alternative asset class” investment.

How secure as an investment do classic cars rate? An “elite automobile storage boutique” industry has emerged to make sure stashed-away collectible cars don’t get either scratched or stolen. One such outfit, the Vault in San Diego, uses biometric scans and personalized access cards “to guarantee that only owners, or their designated representatives, can get anywhere near luxury vehicles.”

Not all the Millennial and Gen Z super rich, of course, have taken the dive into classic car investing. Plenty of the wealthy in these age cohorts are flocking to other alternative investments, everything from fine wines and watches to sneakers and crypto. The overall “alternative asset” category, notes a new Bank of America study, has an amazing 94% of wealthy 43-and-unders interested in it.

This Bank of America Study of Wealthy Americans surveyed 1,000 deep-pocketed adults of all ages and found that 73% of those not yet 44 years old consider themselves “skeptical” of any investment strategy that has them investing only in traditional stocks and bonds.

The wealthy who took part in the new Bank of America survey are all sitting on at least $3 million in investable assets. The younger ones among them turn out to have less than half their investable millions invested in traditional stocks and bonds. Their older counterparts have three-quarters of their investable assets in these classic categories.

The younger rich, the Bank of America study goes on to show, have almost a third of their fortunes in crypto currencies and other alternative investments like classic cars. The older rich have just 6% of their wealth sitting in these alternate asset classes.

But both the younger and older rich do share one intense investment fixation: Both age cohorts want to pay as little as possible in taxes on the income their investments—in whatever category—end up creating.

Under current federal tax law, profits from the buying and selling of assets, traditional and alternative alike, face a significantly lower tax rate than paycheck income. The top combined federal tax rate on ordinary paycheck income now runs 40.8%. But income from capital gains—the income from buying and selling assets—only faces a top 23.8% overall tax rate.

Private equity fund managers have an even lusher loophole—the so-called “carried interest tax deduction”—they will go to any lobbying lengths to forever preserve. This loophole, note analysts at Americans for Financial Reform, “allows private equity and hedge fund executives—some of the richest people in the world—to substantially lower the amount they pay in taxes.”

The loophole lets these fund execs “claim large parts” of their compensation for services rendered “as investment gains.” Ending this carried interest loophole could raise billions in new revenue.

To make sure that this ending doesn’t happen, private equity and hedge fund execs spent $547 million on political campaign contributions in the 2020 presidential election year cycle.

In the current cycle, just 11 private equity billionaires all by themselves have so far pumped over $223 million in contributions to congressional and presidential candidates, an amount that more than doubles, notes the Center for Media and Democracy, what moguls from 147 private equity firms plowed into political campaigns back in the 2016 election cycle.

In other words, billionaire and billionaire-wannabe fund execs are shelling out much more than ever before on candidates they’re counting on to keep our tax code rich people-friendly. For America’s richest, no big deal. They can easily afford these gargantuan political campaign outlays. And they also consider these outlays money exceedingly well spent.

Takes money, as the rich like to say, to make money. The American way! We need to change it. One place to start: passing the pending Carried Interest Fairness Act, legislation that U.S. Sen. Sherrod Brown (D-Ohio) has introduced to eliminate the tax loophole that only “wealthy money managers on Wall Street” could love.