KEEP LOOPHOLE AND CARRY ON
Republicans Love Welfare—for the Rich. It’s Called the Carried-Interest Loophole.
Despite Trump’s promise to shut down the tax break that mostly benefits hedge-fund managers, it’s still there in both versions of the Republican tax plan.
America’s teachers, doctors, business owners, journalists, and janitors pay taxes at rates between 25 percent and 40 percent.
Hedge-fund managers pay 20 percent.
Why? Because of the carried-interest loophole, a tax dodge for a few rich people who work in the financial sector. And even though candidate Donald Trump pledged to eliminate the break, both the House and Senate versions of the tax bill leave the loophole intact. (The Senate version does tweak one detail—how long you have to hold an investment to qualify for the lower rate—but financial experts say that will have no actual effect.)
The reason for that is what political scientists call “legislative capture.” The hedge-fund guys have influence in Congress, especially among Republicans, and they’re very, very interested in keeping this seemingly obscure provision of the tax code just as it is.
Most of us, though, don’t have the time, education, or information to know about it—and have far more pressing issues on their mind, like how to pay our hospital bills or whether the president is working for Russia.
Together with the proposed cut to the highest tax bracket, the estate-tax repeal, and the lowered corporate-tax rate, the carried-interest loophole is part of the most generous, lopsided giveaway to the wealthy in the last century.
It’s not like they need it; wealth inequality is at its widest gap since the 1880s. The richest 1 percent now own 225 times the median wealth level, up from 131 times the median in 1980. That top 1 percent owns 38 percent of the wealth in the entire country; the bottom 90 percent of Americans own 22 percent.
Income inequality has risen, too. Today, the top 1 percent of earners make 20 percent of the income in the country, up from 10 percent in 1980, while the share of the bottom 90 percent has dropped to 51 percent from 65 percent. And the top .0001 percent has seen its income grow at six times the rate of the top 1 percent.
Those trends, not immigrants or technology or globalization or environmental regulation or taxes, is why the middle class is growing worse off while the ultra-rich are better off than ever before.
So why on God’s green earth do wealthy hedge-fund guys—average compensation $2.2 million—need tax relief? They ought to be paying more of a share, not less.
Even the term “carried interest” is a bit of a misnomer. The “interest” it refers to is not interest like on a savings account, but rather the share of profits that a hedge fund (or venture-capital firm, or private-equity firm) takes as its fee—usually 20 percent. Effectively, hedge-fund managers mostly get paid on commission. Portfolio goes up, they get a share of that cut (plus their six- or seven- figure salary). Portfolio goes down, they still get paid for the assets they’re overseeing.
Now, it is true that those portfolio gains are technically capital gains—profits made from investments—rather than salary. And in this country, if you make money from investments, you pay a much lower tax rate (the “capital gains rate”) than if you make money from work.
But this is all BS.
First, that hedge-fund manager is working, no differently from his (yes, it is almost entirely “his”) secretary, his dentist, and his own investment banker, all of whom pay regular income-tax rates. In exchange for researching investments and monitoring returns and the like, the fund manager is compensated. That’s what the word “carry” in “carried interest” means: their pay.
Second, some of that “carry” is paid out regardless of profit or loss. Most hedge funds charge a fee equal to 2 percent of the total funds under management. Invest $10 million, they get $200,000 per year. Even if a profit share is a capital gain, surely this management fee isn’t.
And yet because of the dynamics of legislative capture, any time Congress has tried to close the loophole—President Obama pledged to do so in 2012, add Democrats tried in 2007—a small group of very wealthy people have hired lobbyists, who have sprung into action to preserve it.
When candidate Trump vowed to do away with the carried-interest loophole, most people scratched their heads—most people had never heard of it. But why was Trump, who has never shown much interest in details, suddenly obsessing over this one obscure provision in the tax code?
Well, it depends if you like Trump or if you don’t.
If you like Trump, the reason is that he’s for the little guy. Sure, get rich on Wall Street—but pay your fair share of taxes.
Of course, that doesn’t square with the fact that Trump himself appears to have paid no taxes at all in 20 years. Remember that when you’re filling out your 1040 in April—our multimillionaire president likely hasn’t paid a dime in taxes since the last century.
More likely, Trump was pissed off about the carried-interest loophole because it gives an advantage to Wall Street investors over business owners like himself. The loophole doesn’t apply to profits made by the Trump Organization, after all.
Basically, Trump disliked the loophole because it was bad for Trump.
But it’s no longer 2016. Now Trump’s advisers and donors include the very Wall Street plutocrats who benefit from the loophole: Betsy DeVos, Wilbur Ross, Stephen Schwarzman, Steven Mnuchin, Gary Cohn. So do the some of the biggest donors to the Republican Party. And so now, that lofty campaign promise is vapor.
There are no good rationales for this giveaway to the rich.
Republicans say that this is part of “tax reform” for “job creators.” But trickle-down economics is simply not true. Study after study has shown that when they pay less taxes, the ultra-rich simply save and spend more on luxury items. They don’t reinvest that money in their businesses; they enjoy the cigars.
This is especially true when it comes to hedge-fund guys, who make money not by employing people to do things but by skimming a percentage point off the profits earned from someone else’s money. As Trump himself said in 2015, “The hedge-fund guys didn’t build this country. These are guys that shift paper around, and they get lucky.”
But for nearly 40 years now, Republicans have managed to disguise handouts for themselves, their donors, and the sector of the American population that they overwhelmingly represent as, in fact, some kind of stimulus program for the country. In fact, tax cuts for the highest income percentiles starve the government of resources and dangerously exacerbate risk-taking at the very top. Just look at what has happened in Kansas.
Nor is it the case, obviously, that this tax boon is somehow necessary to keep people working in the hedge-fund business. That is manifestly preposterous; the hedge-fund world is fiercely competitive, because it is astonishingly lucrative. The extra tax benefit is just an unnecessary cherry on top of a gigantic financial sundae.
And anyway, why advantage hedge-fund managers over doctors, lawyers, teachers, and, yes, real-estate developers with sideline businesses in steak, wine, and reality-TV shows?
Because of what I said at the beginning: legislative capture. These guys care an awful lot about this one issue. You probably rank it below the travel ban, mass deportations, mass incarceration, the assault on truth, the Russia investigation, Trump’s packing of the federal bench with lunatics, the tax code as a whole, possible war with North Korea, the destruction of the Environmental Protection Agency, the assault on women’s and LGBT rights—you get the picture. It’s just not that important to you, because you have other things to worry about.
And so the bad guys win.