August 13, 2007

Washington Post Names Names on Carried Interest Loophole

When you run into a tax dodge as obviously egregious as the "carried interest" loophole for faux capital gains, you like to think that any lawmaker who cares a whit about tax fairness will be chomping at the bit to repeal it. So the Washington Post's editorial board is right on when they ask the hard question: what on Earth are some Congressional Democrats thinking when they don't line up against the carried interest loophole? There's one obvious answer:
Why Democrats are balking at these attempts to make the tax code fairer is unclear, but it may have something to do with the generosity these industries show their party.
In other words, the northeastern senators who have expressed reservations about repealing this unintended tax loophole tend to be those who have gotten beaucoup bucks from the hedge fund companies. Check out Connecticut Senator (and presidential candidate) Chris Dodd's war chest here.

The Post highlights (and debunks) the opposition of one western Democrat, Washington State Senator Maria Cantwell:
Some, such as Sen. Maria Cantwell (D-Wash.), say that increased tax costs might be passed along to investors, such as public employee pension funds or university endowments. This concern is also overblown, as some pension fund managers have acknowledged. Plenty of competing industries would not be affected by this bill, so if those affected by the bill raised their rates, they would lose their investors. And if private equity funds were going to pass along their higher tax costs to investors, it would logically follow that when their taxes were cut (as when the long-term capital gains tax was decreased in 1997 and 2003), they would have passed along their greater profitability to investors. Instead, the compensation structure appears to have remained steady.
But the Post breezes right by something that's worth thinking about a bit more: that "[p]lenty of competing industries would not be affected by this bill." New York Senator Chuck Schumer has expressed reservations about the loophole-closing bill because, as he tells it, it would disadvantage certain types of companies that take advantage of the loophole currently, but wouldn't go after other types of firm. If the unaffected "competing industries" the Post is talking about are getting the same sort of tax break that the hedge funds are claiming, the Congressional remedy wouldn't be all that much better than the disease. If Congress is gonna take steps to eliminate the carried interest loophole (and they should), they should do it right and do it completely.


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