With new stories of right and left wing activist groups literally fighting in the streets almost daily, and over the most asinine of reasons — like Ann Coulter (seriously, can you imagine getting your nose busted over the author of “E Pluribus Awesome?”) — now would seem to be the perfect time for some kind of broadly popular bipartisan measure, especially coming from a president people love to call a populist. People forget that “populism,” traditionally, occasionally involved egalitarianism, and not just railing against foreigners. And yet this past week, Donald Trump conspicuously failed to keep one of his only good campaign promises.
That promise was closing the carried interest loophole, which Trump frequently used as a cudgel against Hillary Clinton (this despite her claiming to support it also). That’s the part of the tax code that allows hedge fund managers, private equity, and venture capital firms, who receive a share of the profits on their clients’ investments, to treat their incomes as capital gains rather than income, paying the capital gains tax rate of 23.8 percent, rather than the top income tax rate of 39.6% that everyone else pays. It features nowhere in the tax plan the administration unveiled this week.
There are a lot of complicated ways to explain why it is or isn’t really a “loophole,” and you’ll find various Grovers Dorkquist defending it in tortured blog posts, but it’s one of those areas where none of the details change the rather obvious takeaway — that it allows some of the richest people in the country to pay one of the lowest tax rates. Which is why calls to end it have come from every class and end of the political spectrum. At a conference in Vegas last year, former Treasury Secretary Larry Summers said of carried interest, “Rarely has a policy existed so long with such weak arguments in its favor.”
Venture capitalist Alan Patricof, someone who famously benefits from the loophole, wrote an editorial in the New York Times last year arguing for its closure. “It is past time for fund managers like myself to accept the reality,” Patricof wrote. “We should not be receiving a tax break meant for investors when our work does not involve the risk of our own investment of capital.”
The change would affect about 60,000 households and raise between $2 and and $20 billion in yearly tax revenue. We’re not even talking the top 1%, that’s the top .0005%. Closing it is such a no-brainer, in fact, that Obama, Bernie Sanders, Donald Trump, Hillary Clinton, and even Jeb Bush, whose mother is a classy lady, all supported it during their campaigns.
As Donald Trump himself told Face The Nation, “The hedge fund guys are getting away with murder.” On the same show, he later promised that under a Trump presidency hedge fund managers “are going to be paying up.”
Promises like that were part of what made Trump a populist and not just a demagogue. And given the fact that virtually every candidate in the race and the outgoing president all at least pretended to want to do the same thing, it should be the world’s easiest campaign promise ever kept. One that wouldn’t even involve, say, dropping a giant bomb. Or shooting tens of millions of dollars worth of missiles as a symbolic gesture.
But while the Trump administration will go to insane lengths to keep the promises he made about immigration — like Trump threatening to break up the 9th circuit court for striking down his sanctuary city ruling or Confederately-named Ferengi midget Jeff Sessions trashing Hawaii after a Hawaiian judge struck down the travel ban — carried interest remains.
Which isn’t even really a knock on Donald Trump, or at least, not one on him specifically — it’s a knock on the entire political establishment that Donald Trump got elected by loudly claiming not to be a part of. And back when he was using “your mom” jokes to render hundreds of millions of dollars worth of super PAC worthless, it felt as if there might be one or two unintendedly good consequences of a Trump presidency before he got thrown in the Hague for trying to grope Angela Merkel.
Barack Obama, John Edwards, and Hillary Clinton were all talking about closing the loophole back in the 2008 campaign, and yet it remained, even after Barack Obama was president for eight years, with a Democratic majority in both houses until 2011 and 60 votes in the Senate. It maybe wasn’t even that insane to gamble on Donald Trump being the only one crazy enough to do the thing they’d all been promising for a f*cking decade.
Yet the Trump administration’s tax plan makes no mention at all of the carried interest loophole. The New York Times even suggested that not only might this not raise taxes on hedge fund managers, they might actually pay an even lower rate.
in interviews, several tax experts and Wall Street lawyers said that by not mentioning the matter at all, the administration seemed to be signaling that the tax proposal would effectively eliminate the unique taxation of carried interest. […]
That reading is based on the proposal subjecting pass-through entities — which include partnerships like private equity firms and hedge funds — to a 15 percent tax rate, which is lower than the rate on capital gains and much lower than the top rate on ordinary income.
I’m not sure why the New York Times needed to quote unnamed “tax experts and Wall Street lawyers” about something the administration “seemed to be signaling,” (emphasis mine). Even without the speculation, the truth is damning enough: the Trump administration isn’t even pretending to follow through on carried interest, despite what seems to be near total consensus.
Michael Hiltzik of the LA Times probably got closest to the truth last year when he wrote about why closing the carried interest loophole has such broad support — because it could take the heat off an even bigger tax break for the rich, capital gains taxes in general.
“Carried interest is small potatoes compared with the value of the capital gains preference on traditional investment income,” Edward Kleinbard, the peerless tax expert at USC, told me Monday by email. He observes that the loophole justifiably “sticks in the craw of any thinking American” and benefits only a small subset of the top 1%. “So it makes sense to offer it up to quell popular dissatisfaction with how the tax system is operating.”
The preference rate for capital gains and dividends, costs the treasury an estimated $120 billion a year […]
According to the Tax Policy Center, some 76% of the capital gain tax benefit went to those earning $1 million or more in 2013 — they’re the top 0.1%. Those with annual incomes of $1 million or more got more than half their income from capital gains. And for those earning $5 million to $10 million, it’s more than two-thirds. For comparison’s sake, working-class people earning $75,000 to $100,000 receive on average 75% of their income from wages.
To put it another way, the wealthier you are, the higher percentage of your income tends to come from capital gains, which has the lowest tax rate. Even if you can understand why those rules exist, you can understand why they might piss a lot of people off.
But of course, we’re not there yet, we’re not even close. We still can’t even get our government to commit to closing the obvious-loophole-almost-everyone-agrees-upon, let alone the bigger one they’re using it to distract from. The reasons for this should come as no surprise. Trump, like all the traditional politicians he claimed not to be one of, is surrounded by hedge fund and private equity guys, from Treasury Secretary Steven Mnuchin (former hedge fund manager — whom rising Dem star Kamala Harris inexplicably declined to prosecute for foreclosure violations when she was California’s Attorney General) and Commerce Secretary Wilbur Ross (billionaire former private equity executive) to advisers Stephen Schwarzman (head of a private equity firm) and Carl Icahn (hedge fund manager).
Ross, like Alan Patricof before him, even called for higher tax rates on his own carried interest, telling a tax policy forum “My carried interest, and everyone else’s, will not be eligible” for the lower rate, last October.
Yet here we are. Again. Pressuring our politicians to not be terrible is a good place to start, but it’s also worth wondering about systemic causes. Enacting policies everyone agrees upon is supposed to be where political decision making starts. In the political climate of the last few years, however, anything that doesn’t stir up a frothy culture war fight feels like a loser. Which is how we end up fighting about whether the constitution gives Anne Coulter the right to armpit fart at 400 college kids who hate her. It’s a nice way to distract from the status quo actually having to change anything, even when everyone agrees. But it’s worth remembering that in some areas, consensus can actually exist, even if it’s bad for ratings.