Why Does Chris Dodd Oppose Closing the Carried Interest Loophole?

Connecticut Senator Chris Dodd is drawing increasing scrutiny for his reluctance to support to efforts to close the "carried interest" loophole, which allows wealthy hedge fund managers to claim capital gains tax breaks for income that can't really be described as capital gains.

To be clear, Dodd hasn't said he won't vote for these loophole-closing efforts-- he's just said he wants to think more about it:

"I am concerned about the potential adverse effects that these proposals would have on capital formation, on job creation, and on institutional investors like pension funds and college endowments," Dodd told the [Senate Banking] committee on July 31. "I have begun to hear arguments and analysis, but am not prepared to support any legislation before I have thoroughly analyzed the full impact it is likely to have on investors and markets."

As has been convincingly argued elsewhere, the tax loophole in question is pretty indefensible. It's an illegitimate use of a legal tax break. What makes Dodd's reluctance more puzzling is that back in 2003, Dodd opposed (correctly, in our view) an ultimately successful effort by the Republican-led Congress to drop the top tax rate on capital gains. (More generally, CTJ's 2006 Congressional Report Card gave Dodd an "A" for his tax policy votes.) So if he thinks the capital gains loophole is a bad thing, why would he be in favor of giving the capital gains break to income that isn't even plausibly capital gains?

Well, as the indefatigable Center for Responsive Politics points out, there's a pretty simple explanation for Dodd's position: he gets an awful lot of campaign contributions from folks who would be hurt by eliminating this loophole. In particular, employees of SAC Capital Advisers (a Connecticut-based hedge fund), in a breathtaking display of unity, have given Dodd's presidential campaign $344,000 so far.

There are good-news and bad-news ways of thinking about this linkage. The good-news way would be to say that part of a Senator's job is to reflect the interests of his constituents, and that looking after the interests of the businesses that are the backbone of Connecticut's economy is just a thing he should be doing.
The bad-news way would be to point out that Dodd is an awful lot more likely to "reflect the interests" of constituents who communicate their positions to him using suitcases stuffed with cash.

Either way, the choice Dodd faces is between acting in the narrow interest of an important constituent or acting in the broader interests of American (and Connecticut) working families. Stay tuned...