Must Congress Always Cave at Crunch Time?

Sam Pizzigati

With millions of Americans out of work and hurting, lawmakers who claim they worry about budget deficits spent last week forcing ‘compromises’ that will save hedge fund kingpins billions in taxes.

You want to lead a charmed existence? Just start up your own private investment fund — a hedge fund perhaps or a private equity operation or maybe a venture capital shop.

As an investment fund manager, you’ll live the sweet life. You’ll get to invest the mega millions you collect from deep-pocket investors almost any way you want, without hardly any pesky government regulation. And you get to keep — for yourself — 20 percent of any profits those investments end up making.

Even better yet, you won’t have to pay regular federal income taxes on that 20 percent. The charming reason: a neat little loophole in the federal tax code that lets billionaire investment fund managers pay taxes — on the bulk of their windfalls — at a 15 percent “capital gains” rate. That’s less than half the current 35 percent top federal tax rate on ordinary income.

In today’s Great Recession America, most of us do not, of course, lead lives anywhere as charmed as the lives of private investment fund managers. We live in a workaday world where 10 percent of us have no work.

And many more Americans in our world — hundreds of thousands of teachers and other public employees — will soon be joining the ranks of the jobless as revenue-starved state and local governments shift this summer into austerity mode.

The revenues these governments need could come, in large part, from shutting down the investment fund manager capital gains tax scam. Last year, the top 25 hedge fund managers, just by themselves, took in a combined income of $25.3 billion. The capital gains scam — known in the trade as the “carried interest” loophole — likely saved these 25 at least several billion in taxes.

So what would a Congress committed to the well-being of the entire American people do about all this? The no-brainer answer: That Congress would rush to close the “carried interest” loophole and put the billions this loophole is saving financial industry power suits to work for out-of-work Americans.

Last week Congress seemed to take a giant step in just that direction. In the House, lawmakers narrowly passed, by a 215-204 margin, a $115 billion bill promisingly entitled the “American Jobs and Closing Tax Loopholes Act of 2010.”

But House Democratic leaders, to round up enough votes to get the measure passed, had to agree to cut back on the legislation’s original aid for the jobless and water down the bill’s loophole closing.

The bill, as passed, doesn’t fully close the carried interest loophole. Hedge fund billionaires and their peers elsewhere in private investing will, under the House legislation, still get to claim as personal capital gains 25 percent of the profits they make investing other people’s money.

Actually, last week’s House bill gives investment fund managers an even better deal than that. At the last minute, investment fund-friendly lawmakers forced still another concession from the House Democratic leadership. They won a provision that will delay any carried interest changes until January 1, 2011.

For the next two years after that, investment fund managers will be able to claim a capital gains tax discount on 50 percent of their investment fund profit dollars.

2012 capital income

This delay in implementing carried interest reform will cost the federal treasury billions. Private investment funds, the Wall Street Journal predicts, will now move quickly to finalize deals before the new tax rates go into effect. So how could lawmakers justify the delay? Lawmakers say they wanted to “give the investment community time to adjust” to the new tax rules.

Jobless Americans will get no such adjustment time. The House leadership, to gain votes from “fiscally conservative” Democrats for last week’s legislation, also had to agree to excise from the bill tens of billions in help for economically hard-pressed Americans, including a $6.8 billion subsidy that would have helped the unemployed pay their health care bills.

signupThe U.S. Senate will take up its version of the House jobless aid and loophole-cutting legislation after the chamber’s Memorial Day recess, in the second week of June. The Senate appears ready — and eager — to help America’s beleaguered investment fund managers through these difficult days.

Senate Republicans remain steadfastly opposed to any carried interest tax reform, and several Senate Democrats, most notably 2004 Presidential candidate John Kerry, are pushing proposals that would exempt even more of investment fund manager income from regular taxes than the House version.

Progressive advocacy groups are working to mobilize average Americans against this giveaway to the rich. But the rich, even if they lose this latest skirmish on carried interest reform, will still have plenty of reason to gloat.

The central capital gains tax issue, after all, goes far deeper than the scam investment fund managers have been running. Yes, the tax code certainly should not let these fund managers claim any capital gains tax breaks. But the tax code also should not be giving a tax break to any capital gains income.

The basic issue remains simple: Why should wealthy Americans who make money from money get preferential tax treatment over average Americans who make money from their own personal labor? This question ought to sit front and center in our national tax debate. Instead, the question seldom ever gets asked.

America’s plutocrats, over the next few weeks, may lose a battle or two on the carried interest front. But these plutocrats, as a class, are still most definitely winning the war.

Sam Pizzigati edits Too Much, the online newsletter on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Too Much appears weekly. Read the current issue or sign up to receive Too Much in your email inbox.

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