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Pimco's Gross urges 'privileged 1 percent' to pay more tax

Pacific Investment Management (PIMCO) founder and co-chief investment officer Bill Gross plays golf on the first hole at Pebble Beach Golf Links before the start of the AT&T Pebble Beach Pro-Am in Pebble Beach, California, February 8, 2012. REUTERS/Robert Galbraith

By Sam Forgione and Jennifer Ablan

NEW YORK (Reuters) - Bill Gross, manager of the world's largest bond fund, urged fellow members of the "privileged 1 percent," earning the highest incomes, to support higher U.S. taxes on carried interest and capital gains to help the economy.

Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., said in his latest investment outlook letter on Thursday that the super wealthy "should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates."

Carried interest refers to a large portion of the investment gains realized by private equity managers and executives at some venture capital firms, real estate and hedge funds.

The gains are taxed at a top rate of 20 percent instead of the nearly 40 percent top rate on ordinary income paid by the highest earners.

Easy credit policies have also allowed the rich to make billions of dollars, Gross said.

Gross, who oversees roughly $2 trillion in assets, noted that billionaires Warren Buffett and Stanley Druckenmiller, founder of Duquesne Capital Management and one of the best performing hedge fund managers of the past three decades, have advocated similar proposals.

"The era of taxing 'capital' at lower rates than 'labor' should now end," Gross said.

Gross, who acknowledged he was among the 1 percent, noted he is writing investment letters that "'dis' the success that provided me the soapbox in the first place." He said that increasing taxes could improve the U.S. competitive position compared with Germany and Canada.

"Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1 percent pay, consider how much of the national income you've been privileged to make," Gross added.

Gross, whose $250 billion Pimco Total Return Fund is the world's largest mutual fund, said that developed economies function best when income inequality is minimal.

In an interview on cable television network CNBC on Wednesday, Gross said that he and his wife, Sue, have pledged to give away all of their money before they die, which he referred to as an "Andrew Carnegie" pledge.

"Carnegie said that a wealthy person dies disgraced if they go to their maker with one penny, and so Sue and I are well on our way," Gross said.

Gross also laid blame on the Federal Reserve for contributing to the imbalances in income growth.

He characterized the Fed's easy money policies since late 2008 as a massive $1 trillion share buyback program nearly every year that has driven investment in risk assets and stocks rather than in "productive plant and equipment."

The Fed is currently buying $85 billion in Treasuries and agency mortgage securities per month. The Fed has held interest rates near zero since late 2008 and has quadrupled the size of its balance sheet to more than $3.7 trillion through three rounds of bond buying.

Gross said, "Long-term growth for each company, and for all countries, depends not on balance sheet alchemy and financial wizardry, but investment and the ultimate demand for a company's

or a country's products."

In a post to Pimco's Twitter account on October 24, Gross criticized billionaire Carl Icahn's effort to have Apple commence a $150 billion share buyback, saying, "Icahn should leave #Apple alone & spend more time like Bill Gates. If #Icahn's so smart, use it to help people not yourself."

The following day, Gross said, "By the way, I should spend more TIME like Bill Gates too - we all should. He and Melinda are great paragons."

(Reporting by Sam Forgione; Editing by Theodore d'Afflisio and Kenneth Barry)