There’s no rational or reasonable explanation to justify the hedge fund tax loophole. It may sound like one of those turgid debates that make most people roll their eyes, but it’s really quite simple: the tax rates on hedge-fund managers’ income are, inexplicably, lower than the rates on everyone else’s income.
The debate is not about taxing capital gains like regular income, though some of the less honest among us might make that claim. The point here is that hedge-fund managers should see their income treated just like our income. Right now, they pay capital-gains rates (15%), we pay income-tax rates (35%). The president, congressional Republicans, and a disconcerting number of Dems (Chuck Schumer, we’re looking at you) believe they deserve to keep a tax break that has no rational purpose.
And what a break it is. As a result of this bizarre policy, the government loses out on $6.3 billion of revenue each year (a sum which could pay for healthcare for 3 million children). What’s more, almost $2 billion a year in unjustified tax breaks go to just 25 individuals.
So, this is the kind of thing that Congress would want to fix, right? Apparently not.
Senate Majority Leader Harry M. Reid (D-Nev.) has told private-equity firms in recent weeks that a tax-hike proposal they have spent millions of dollars to defeat will not get through the Senate this year, according to executives and lobbyists.
Reid’s assurance all but ends the year’s highest-profile battle over a major tax increase. Democratic lawmakers, including some presidential candidates, had been pushing to more than double the tax rate on the massive earnings of private-equity managers, who the Democrats say have been chronically undertaxed.
Ugh. This is discouraging, to put it mildly.
Lawmakers have over a year before the end of the 110th Congress, but the leadership has already decided there’s no time.
In response, private-equity firms — whose multibillion-dollar deals have created a class of superwealthy investors and taken some of America’s large corporations private — hired dozens of lobbyists, stepped up campaign contributions and lined up business allies to wage an unusually conspicuous lobbying blitz. Their argument was that higher taxes would run counter to accepted tax policy and slow economic growth.
Some lawmakers have touted the tax boost as a way to pay for such expensive measures as the repeal of the alternative minimum tax, which this year alone threatens to increase taxes on 23 million households. But lawmakers and lobbyists agree that if the tax is not raised this year, its chances are not strong in 2008, either; Congress tends to be leery of tax increases in election years.
In one meeting with industry representatives last month, Reid said the private-equity tax plan would not be considered in the Senate this year, according to a participant. Rather than citing the lobbying push, Reid implied that the reason had to do with the lack of time on the jammed Senate schedule.
Reid has made similar comments at meetings on Capitol Hill, according to participants who declined to be identified because the gatherings were private. Some lobbyists also said Reid aides had told them that the tax increase would not make it through the Senate this year.
Reid’s spokesman, Jim Manley, reflected that doubt in an e-mailed response to a question yesterday: “Given the difficulty in getting any legislation through the Senate and the little time left this year for moving other issues important to the American public, it is unclear whether there is sufficient time to address the appropriate tax treatment of private equity firms.”
It’s possible Reid expects a Republican filibuster, which he knows he can’t beat. But isn’t it worth a shot? Shouldn’t we get senators on record, seeing who supports one (lower) tax rate on hedge-fund managers, and who supports another (higher) tax rate on everyone else?
This should be a gut-check for congressional Dems. All of the leading Democratic presidential candidates are on board with ending the hedge-fund tax break — called “carried interest,” or “the carry” — as are a handful of noteworthy GOP elder statesman. Legislation is already on the table; it just needs a chance to move.
Irwin M. Stelzer, the director of economic policy studies at the right-leaning Hudson Institute, said flatly, “I don’t think there’s an argument on the equality side for the current tax treatment.”
And if Dems cave, as they appear to be doing, the right won’t even have to try and come up with one.