We can’t have a tax system that unjustly favors the wealthy at the expense of the middle class. The carried interest loophole benefits the rich and powerful.
Effectively closing the carried interest loophole is a critical measure to create a more equitable and balanced economy.
The politicians have been at least publically pillorying the loophole since at least 2007, with dozens of proposals over the years to eliminate this clear-cut affront to reasonableness.
But the hedge fund industry keeps paying the extortion price for politicians to punt on the issue again and again. For politicians, it doesn’t get better than free money for doing nothing.
Just about everyone involved knows that closing the loophole will go a long way toward rectifying our current fiscal inequalities.
- At the most basic level, it’s just a matter of fairness, incentives, and priorities. Why should the wealthiest hedge fund managers (many of whom make their money firing people by making companies more “efficient”) pay taxes at a rate less than half of what they should?
- Closing this loophole would generate additional revenue for the government, which could be used to pay down the debt, and fund important social programs and infrastructure projects.
- It would help to reduce income inequality by ensuring that the wealthiest are paying their fair share of taxes, not hiding behind the Byzantine tax law.
- Perhaps most importantly, it would be a clear win for the idea that the political class doesn’t always do the bidding of money. That there are times when common sense and the benefit of the country come before political donations. Whether that is true or not is debatable, but this could be a meaningful ray of hope.
It’s time we shut down this absurd loophole.
What is the Carried Interest “Loophole”?
The carried interest loophole is a tax provision that allows investment fund managers to pay a lower tax rate on their income compared to other high-income earners. Essentially, it allows them to treat their earnings from managing investments as capital gains rather than ordinary income, which is taxed at a 15 percent rate rather than the closer to 35 percent people in their bracket pay.
It’s a legal maneuver that allows people investing other’s money, largely those at the top of the income bracket, to pay much lower taxes than they otherwise would.
It means hedge fund manager, who in many cases are vulture capitasts that close businesses and elimitane jobs (getting paid to cause harm on individuals and local economies) ALSO get to pay less than half in taxes than what they should. Is vulture capitalism really what we want the tax system to incetivize?
“Certain investment managers – including private equity managers – benefit from a loophole that allows them to pay a reduced 15 percent tax rate on income received as compensation, rather than ordinary income tax rates up to 35 percent that all other Americans pay.”
-Sander Levin (D-MI) in 2012
Why is it there?
The supposed rationale behind this provision is to encourage investment and risk-taking.
“Fund mangers are typically paid a 2 percent management fee plus 20 percent of any profit they generate, the portion known as carried interest. Because their compensation is based on investment performance, they have argued that that money should be taxed at the lower capital gains rate.” this is from a NY Times article from 2010!
But investment fund managers are already incentivized to invest wisely and earn high returns because they typically receive a percentage of the profits they generate for their clients. The loophole is unnecessary and unjustifiable tax break for the wealthy.
Nobody Likes You Carried Interest Loophole
“If you were to sit down with a focus group and a whiteboard, you would have a hard time coming up with a policy with less populist appeal than the nearly three-decades-old loophole that cuts private equity billionaires’ tax rate almost in half.”
“Both President Biden and former President Donald Trump tried to [close the loophole]… Many on Wall Street, including Jamie Dimon, chief executive of JPMorgan Chase, and Robert Rubin, a former Treasury secretary, have called for its end.”
People Have Been Complaining About It Since At Least 2007
Back in 2010, the house passed a broader bill that contained language seeking “to change the tax treatment of “carried interest”
Here’s a press release (which is no longer available online, you’ll have to trust me) from 2012 from now-retired senator Sander Levin (D-MI), who at the time was the Ways and Means Committee Ranking Member
[Levin] “has twice authored legislation – which he will reintroduce again this year – to tax carried interest compensation at the same ordinary income tax rates paid by other Americans…. Levin first introduced the measure in 2007 and it has passed the U.S. House four times as part of broader measures since then. It has yet to pass the Senate.”
But of course… Nothing happens.
If you like to watch digital bills gather dust, here is the newest version of the bill “Ending the Carried Interest Loophole Act” – introduced by in August of 2021 by Sen. Ron Wyden [D-OR].
The Unfairness of the Carried Interest Loophole
The carried interest loophole is a striking example of inequality in wealthy societies. Those with enough financial resources buy their way out of tax bills that would rightfully apply to them.
A small number of the wealthiest people exploit the system to pay a significantly lower taxes rate than the rest of us. It creates an imbalance in the tax system, where wealthy investors and investment fund managers pay a much smaller percentage of earnings than everyone else.
The Fix Is Straightforward
There are not many issues that are so simple to get done.
The Congressional Budget Office explains that all that has to be done is to amend the tax code to “treat carried interest that general partners receive for performing investment management services as labor income, taxable at ordinary income tax rates and subject to the self-employment tax.”
According to the CBO, this option would “equalize the tax treatment of income that general partners received for performing investment management services and the income earned by corporate executives who do similar work. ”
Why It Needs To Go
Closing the carried interest loophole will have an immediate, practical effect on our society.
What Are We Rewarding?
The carried interest loophole sends a terrible message about what matter. We reward the wealthy at the expense of the rest of the country. It is a perverse incentive that values money over productivity and encourages short-term thinking rather than long-term sustainability.
“The carried-interest loophole, Barack Obama said, upset “the balance between work and wealth.” Donald Trump claimed the fund managers who availed themselves of this tax break were “getting away with murder.” Joe Biden, like both of his predecessors, ran for president on a pledge to end it.”
But for a decade and a half, private equity’s favorite tax break, which delivers hundreds of millions of dollars annually to the guys in blue button-downs and matching fleeces who bought your company and laid you off, has been the most unkillable bad idea in a town with no shortage of them, a testament to the unstoppable combination of money and inertia.
Stop Making Inequality Worse
We’ve got to stop rewarding the wrong things.
Why do we continue to let wealthiest skirt their tax responsibilyity?
By getting the same percent of money from hdege fund manager as we do everyone else, we can do a very tiny bit to stop the ever-increassig acumulation of weath at the top.
The loop is a clear transfer of wealth from the poor up to the top level earners. The poor pay more in taxes while the wealthy pay less. It exacerbates the unequal distribution of resources across our the country.
Get More Tax Dollars
Closing the carried interest loophole would also directly benefit the federal budget. It could potentially bring in billions of additional revenue each year. Revenues that can be used to help pay down debt and invest in social programs.
How much money would closing the loophole raise?
The CBO estimates that closing the loophole would raise about $1.4 billion annually, or $14 billion over ten years. The estimate is based on a number of factors, including the number of people who would be affected by the change, the average amount of income that they would have to pay taxes on, and the current tax rates.
In the grand scheme of things maybe $14 billion isn’t that much, but like they say in Washington,
“A billion here, a billion there, pretty soon, you’re talking real money.”
“Victor Fleischer, a law professor at the University of California, Irvine, and former counsel for the Senate Finance Committee, has calculated that it could amount to as much as $180 billion over 10 years.”
More conservative estimates are $14 to $18 billion.
What If We Used The Money To Pay Down The National Debt?
Republicans like to pretend they care about the deficit, here’s a straightforward way to make a dent in it without having to cut anything.
By using this money for debt reduction, we could save ourselves a lot of money on wasteful interest payments. These savings would compound as more and more money was freed up to pay down the debt.
Because we don’t know exactly how much money closing the loophole would raise, what interest rates will be, and other information, an exact number is hard to get.
But as a rough estimate, we can use the average interest rate on the national debt over the past few years, which has been around 2 percent. If we assume that the $15 billion in additional revenue generated by closing the carried interest tax loophole was used to pay down the national debt and that the interest rate on the debt remained at 2 percent, then the interest savings would be approximately $300 million per year (i.e., $15 billion multiplied by 2 percent).
It’s Simple And Popular
Closing the carried interest loophole is a common-sense idea. It is simple and popular. This proposal has bipartisan support and is popular with the electorate. Nobody wants to preserve it except hedge fund managers and those they pay or contribute to.
It Would Be A Good Signal
Perhaps most importantly, closing the loophole would send an important message that politicians are not always paid for, and that they sometimes do what is right for the country.
It would send a signal that the government is serious about ensuring that everyone pays their fair share of taxes.
It would show reasonable progress towards addressing economic inequality in our society, restoring some hope to those who need it most. Closing the carried interest loophole is a small but meaningful step in the right direction. It’s time to do the right thing and close this loophole.
The Powerful Will Not Let It Go Away Easily
If you want what is best for the country, closing the loophole is a no-brainer.
But as they make clear every day, politicians don’t work for the people, they work for their corporate owners.
In what was transparently a PR stunt, politicians pretended to care about closing the loophole by placing a provision in Biden’s 2022 Build Back Better Act that would have closed it, but of course, it didn’t pass, it was all a rouse.
What was presented as a good-faith effort was really just posturing that anyone “in the know” know was doomed to failure. No doubt politicians made the rounds, shaking the can in front of the hedge fund manager to get a few more donations.
Won’t They Just Find New Loopholes?
It’s possible that financial types, their lawyers, and accountants could try to find other ways to minimize their tax liabilities if the carried interest tax loophole were closed.
But closing the carried interest tax loophole would make it more difficult for them to do so.
The loophole is currently a broad one, and closing it would narrow the scope of this preferential treatment, making it more difficult for financial types to avoid paying taxes on their income.
Closing the loophole would still result in these individuals paying higher taxes than they currently do.
Of course, there are many other ways that wealthy individuals and businesses can avoid paying taxes. But there are limits to how much people can legally avoid paying taxes. The tax code has various provisions that are designed to prevent abusive tax planning and to ensure that taxpayers pay their fair share of taxes. If financial types and their advisors engage in aggressive tax planning that crosses the line into illegal tax evasion, they could face serious penalties and even criminal charges.
That’s why the hedge fund industry has been fighting so hard.
Taking One for the Team
According to te what the media told us, the provision closing the carried interest loophole in Biden’s infrastructure bill failed to gain enough support because of opposition from Arizona’s Democratic Senator Kyrsten Sinema. She argued it was more important to focus on comprehensive tax reform rather than piecemeal changes. (How a bill of this size comes down to one senator is a story for another day).
Her colleagues did their part, condemning the “betrayal” of her progressive values and an endorsement of the status quo that benefits the wealthy.
But despite widespread condemnation and pearl clutching at the time, the issue has basically disappeared since.
Although she never put out a press release, took questions, or really had to answer for her decision, the New York Times reported “she has continued to defend her position and has emphasized the need for comprehensive tax reform that addresses the broader issues in the tax code… Ms. Sinema said she would work with Senator Mark Warner, Democrat of Virginia, on separate legislation to address the preferential tax treatment for hedge fund income, sometimes called the carried interest loophole. She said they would focus on “protecting investments in America’s economy and encouraging continued growth while closing the most egregious loopholes that some abuse to avoid paying taxes.”
I couldn’t find that “statement” anywhere online, just like I can’t find any details of this “comprehensive tax reform.”
How Much did the Hedge Fund Industry pay Sinema to block Carried interest?
When I asked Google’s Bard how much the hedge fund industry paid Sinema to prevent closing the loophole, this is what it said:
“It is difficult to say exactly how much money the hedge fund industry paid Kyrsten Sinema to block the carried interest loophole. However, it is clear that she received a significant amount of money from the industry. According to OpenSecrets, a non-profit organization that tracks political spending, Sinema received over $2.2 million from the financial sector since 2017. This includes donations from hedge funds, private equity firms, and other financial institutions.
“It is also worth noting that Sinema has close ties to the financial industry. She previously worked as a consultant for a hedge fund, and she has been a vocal critic of efforts to raise taxes on the wealthy. It is therefore likely that she was influenced by the money she received from the hedge fund industry when she made her decision to block the carried interest loophole.”
Google’s Bard, April 2023
Here are some more headlines
- Sinema received nearly $1 million from Wall Street while killing tax hike on investors – PBS
- More Than 50 Billionaires—Including A Couple Of Trump Supporters—Have Donated To Senator Kyrsten Sinema – Forbes
- Sinema took Wall Street money while killing tax on investors – News 12
- Kyrsten Sinema’s donations from investors surged to nearly $1 million – Fortune
- Kyrsten Sinema Donors Score Win From $14B – Business Insider
Lobbying To Protect The Hedge Funds
It’s easy to blame her, but the reality is that Sinema was just the scapegoat in a well-orchestrated performance. If she hadn’t played her role, there would have been another reason
Just like Charlie Brown and the football, honest politicians and accountable leadership is always an election cycle away.
Paying For Political Cover
It’s no surprise that the hedge fund industry is a major donor to politicians, both Democrats and Republicans. In the 2020 election cycle, hedge funds contributed over $625 million to federal candidates, PACs, and outside spending groups. This was more than any other industry except for the real estate industry.
The only people who don’t want it closed are those who get to keep more money each year and the people they pay (politicians and lobbyists).
In a political environment defined by money, it’s no surprise such a simple change is being ignored by elected officials.
A Call to Action – Taking Steps Toward a More Equitable Tax System
Closing the carried interest loophole is a great way to make the tax system more equitable, raise money to pay off the debt, and signal to Americans that their elected officials are concerned about them.
Change is often hard to come by, as it requires a collective effort and an extraordinary level of commitment. This is why closing the carried interest loophole is an issue that we cannot ignore.
The road ahead is certain to be a long one, but what we must do to create real change is undeniable.
Closing the loophole can be seen as a first step on a much longer road toward spreading economic equality and ensuring brighter futures for all.
Now more than ever, it’s incumbent on us all to take steps toward creating a more equitable tax system for everyone.
Our responsibility is clear: we must fight against corporations and the privileged few who seek to deepen inequality in our economic system by any means necessary.
We owe it to future generations to make this important change happen now – to strive for a fairer society that supports all people equally rather than perpetuating the inequality of generations.
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$18 billion over 10 years plus lets say another $3 billion in interest savings is $21 billion or 0.0005% of the current debt. Assuming that the government, who has been irresponsible enough to run up this debt, will actually use it to pay down debt as opposed to just spending, the savings are virtually meaningless. We should be lowering all tax rates, starving the government, force it to shrink dramatically, slash its % of GDP and labor participation and look at a massive debt consolidation program that would have to be applied to both government and private. The dollar is dead, we watched it get destroyed. There is no lipstick that will make this pig look good and there is no reason to send the government more tax money but the opposite.