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While they are quivering and wavering on the Iraq War, let me suggest that there is another issue Democrats cannot capitulate on: economic fairness. It’s been said, repeatedly, that the Democrats took control of Congress in 2006 because of the anger over the Iraq War. I don’t disagree that the war was, and should have been, the central issue. But, a close second was the economic distress faced by many people who are outraged by the greed of a handful of the corporate and social elites. Which brings me to the taxation of hedge fund and private equity executives.

  Yesterday, the Senate and House held hearings on the question of whether hedge funds executives should be taxed at the same rate as other rich people (the House hearing was more broadly on the question of tax fairness). Yes, that tells you how ludicrous the debate has become. Hedge fund and private equity executives have used a wrinkle in the tax code to pay just 15 percent on so-called "carried interest"; other wealthy people pay 35 percent (also too low but that’s a different debate). And, of course, this says nothing of the spectacle of people who make hundreds of millions of dollars and even billions of dollars paying a lower rate of taxes than a middle-class person. Rep. Sander Levin has introduced a bill (H.R. 2834) that would, in fact, raise the tax rate on "carried interest."

The New York Times piece today about the hearings exposed how completely shameless, and obscenely greedy, these hedge fund and private equity executives are. In trying to avoid an increase in the tax, these folks are arguing that such an increase would hurt the economy and the millions of people whose pension fund money the hedge funds invest. This is a bogus argument:

Specialists testifying before House and Senate committees said that although the pension funds had invested billions of dollars in hedge and equity funds, the amounts are a small part of their overall assets — less than 10 percent, according to recent studies. As a result, they said, an increase in the tax rate for the managers of the hedge and equity funds would not significantly harm pension funds.

And

But Leo Hindery Jr., a former executive in the cable television industry who is now managing partner at a private equity fund, InterMedia Partners, disagreed, telling the committee that the industry had taken advantage of a "tax loophole the size of a Mack truck."

"Congress, starting with this committee, needs to tax money management income, what we call carried interest, as what it is, which is plain old ordinary income," Mr. Hindery said. He called the argument that the tax increases would hurt the economy "self-serving" and "complete poppycock."

He was joined by William D. Stanfill, a founding partner of TrailHead Ventures, a venture capital firm in Denver, who said that his compensation should be taxed the same as teachers, firefighters and movie stars. "I don’t think it’s fair for those teachers and firefighters to subsidize special tax breaks for me and other venture capitalists," Mr. Stanfill said. "Or for private equity and hedge fund managers."

In plain language, this is utter bullshit and the true definition of audacious. These folks are so intent on making sure that they can keep buying yachts with helicopter pads and build mansions that would make the robber barons of the 19th and early 20th Century look like paupers that they seriously argue that somehow they will have less incentive to take the money of pensioners and invest it. Fine, let's raise their taxes and, since the new profits will discourage them from investing, offer them jobs as maintenance workers, hospital aides or firefighters where the job satisfaction is higher. Lewis Carroll could not invent this fantasy world.

In fact, at the House hearing, there was this clarifying moment:

A moment of comic relief came when one member of the House Ways and Means Committee pressed some of the panelists who work in the hedge fund industry to estimate the average pay among hedge fund managers.

After an awkward silence, and prodding by the congressman, one witness conceded "millions," and then $500 million. The top earner last year, according to Institutional Investor’s Alpha magazine, earned $1.7 billion.

And we can’t stand for this. A letter signed by more than 300 national, state and local non-profit organizationssays it quite well:

As Warren Buffett recently stated, it’s an outrage that Americans who are paid millions or even billions for their labor can be subject to lower federal tax rates than their middle-income receptionists. This is particularly true of private equity fund managers, the multi-millionaires who pay a 15 percent federal tax rate on compensation for their services (something they call "carried interest") rather than the higher tax rate that normally applies to someone at their income level.  

There are no official estimates of the cost of this loophole yet, but most experts agree it costs taxpayers several billion dollars each year.  

Just as important as the cost of this loophole is its outrageous unfairness. A receptionist, a firefighter or a police officer who is unmarried and earns $50,000 a year pays a federal income tax rate of 25 percent on a large share of her income. That’s after she pays around 15 percent of all of her income in federal payroll taxes. But thanks to a loophole in the tax code, private equity fund managers pay only the 15 percent capital gains tax on their carried interest, which is usually most of their compensation.  

The capital gains rate applies to income received from investments, but the fund managers are not actually investing their own money in most cases. They’re managing other people’s money and getting paid for their work, just like the rest of us who get paid by the hour or on a salary to provide a service. Even Greg Mankiw, former Chair of the Council of Economic Advisors under President Bush, has argued that there simply is no rational reason why these fund managers should be taxed at the lower 15 percent rate.

Now, where is the party on this issue? My sources tell me that the House Democrats are pretty good—so far. It’s a little unclear about what the Senate Democrats will do. But, there should not be a single Democrat who isn’t on the right side of the issue: should the rich and wealthy, who are making astronomical profits, be allowed to pay less than hard-working Americans? There can be no better issue to take to the voters that illustrates the difference between Democrats and Republicans.

But, we need to have some concerns because the issue of economic fairness often is tossed by the wayside when it comes to raising campaign cash. Sen. Charles Schumer, who has been far too much of a defender of Wall Street interests, initially appeared to be ready to try to block any such tax hike. Others say Schumer just doesn’t want to single out the industry and wants to raise taxes on wealthy people across the board. That may turn out to be a fine proposal. But, he needs to be watched carefully.

And we also need to keep an eye on Rep. Rahm Emanuel. Today’s Wall Street Journal reports on a proposal Emanuel is floating:

Rep. Rahm Emanuel (D., Ill.) said he soon will introduce a bill capping hedge-fund managers' offshore deferrals to the same amount most people are permitted to defer tax-free each year into 401(k) and individual retirement accounts. For 2007 that amount is $19,500.

The legislation would be aimed at managers of hedge funds that are based overseas. Managers of these funds, under current law, can put off for years the income taxes due on large chunks of their compensation. They can also reinvest the deferred amount in their funds and let it grow tax-free in the meantime.

But, the question is whether Emanuel’s proposal is actually a bait-and-switch tactic:

Mr. Emanuel's proposal may serve as a diversion from an issue he says is more complex: the taxation of carried interest, a cut of profits received by managers of hedge and private-equity funds as well as some real-estate investors. He so far hasn't been a vocal supporter of legislation pushed by others that would raise tax rates on carried interest.

No, Rahm, this isn’t complex. It is pretty straightforward.

What the party should do is organize a press conference in front of the Capitol, have every single member of the House and Senate there and sign  a pledge to support and vote for Sander Levin’s bill and any companion bill that arises in the Senate.

No retreat and no surrender when it comes to economic fairness.

Originally posted to Tasini on Fri Sep 07, 2007 at 07:31 AM PDT.

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Comment Preferences

    •  It IS Class War (2+ / 0-)
      Recommended by:
      Mensor, phidda

      Guess what class most of our elected officials belong to.

      We are now in a system where wealth controls the government and directs the distribution of wealth. It is a spiral of increasing economic unfairness that usually ends in revolution.

      This is CLASS WAR, and the other side is winning.

      by Mr X on Fri Sep 07, 2007 at 08:33:44 AM PDT

      [ Parent ]

  •  Recommended for this line alone (8+ / 0-)

    Fine, let's raise their taxes and, since the new profits will discourage them from investing, offer them jobs as maintenance workers, hospital aides or firefighters were the job satisfaction is higher.

    as well as for the whole diary.

    "A revolution without dancing is a revolution not worth having"

    by Mensor on Fri Sep 07, 2007 at 07:33:40 AM PDT

    •  thks (5+ / 0-)
      Recommended by:
      Mensor, kurt, phidda, lams712, Faheyman

      It just burns me every time I read the nonsense that these folks who make obscene incomes just won't invest if they make slightly less--the equivalent to pocket change for them--while most people out there are struggling to make ends meet. I literally scream "f-you" when I read that (you don't want to be around me for that).

      •  Response from a DLC-er (1+ / 0-)
        Recommended by:
        DBunn

        It's important that we maintain incentives for investment and labor.  It's more important, however, that the tax be formally fair (ie, two people in the same bracket pay the same rate for the same kind of income).

        And using the gains rate on carried interest flatly violates the principle of formal fairness.  I wouldn't even say this is exploitation of a loophole; I'd say it's tax evasion.

      •  How to excorcize the supply-side demons! (0+ / 0-)

        Or the free-market gremlins.

        The Republicans have used economics as a weapon against the middle class, and if you feel like getting angry, watch this video. Parenti blows apart the idea that free unregulated markets produce wealth for all.

        (Just ignore or skip past the the dude at the beginning by like 20-30 secs)

  •  Great Piece (3+ / 0-)
    Recommended by:
    Mensor, lams712, Faheyman

    I hope this makes the rec list

  •  Thanks. Important. Suggestion: (1+ / 0-)
    Recommended by:
    lams712

    Put key stats in bold and/or in pie chart form. Visual display of disparities. Impact.

  •  I wonder about the framing here (2+ / 0-)
    Recommended by:
    bronte17, lams712

    Where's the evidence of capitulation? There's a bill - cosponsored by the Chair of Ways and Means - and a whole day hearing on tax fairness that looked at carried interest and off-shore deferral.

    It looks like House Dems are actually lining up for a big fight on economic justice here, not a capitulation.

    "Be radical, be radical, be not too damned radical." - Whitman [-4.50, -5.79]

    by DemHillStaffer on Fri Sep 07, 2007 at 07:59:19 AM PDT

    •  I hope you're right... (2+ / 0-)
      Recommended by:
      Tasini, Mensor

      ...

      It looks like House Dems are actually lining up for a big fight on economic justice here, not a capitulation.

      Unfortunately, the way things have gone on several important issues, it wouldn't surprise me in the least if there is another capitualtion.

      Maybe that's an infantile overreaction, but the record of this Democratic Congress thus far is not making me feel optimistic.

      "...if my thought-dreams could be seen, they'd probably put my head in a guillotine...." {-8.13;-5.59}

      by lams712 on Fri Sep 07, 2007 at 08:03:06 AM PDT

      [ Parent ]

    •  Well... (2+ / 0-)
      Recommended by:
      Mensor, lams712

      I think this is a "we have to be very alert" here warning. I don't think it is a stretch for most of us to be suspicious when it comes down to what Emanuel and Schumer will choose in a fight if there is a conflict between campaign cash and the right thing to do. I think I note that things are in good shape in some respect but we've already seen the party waver, in my opinion, on Iraq and I think it's important that we be vigilant.

    •  Capitulation (2+ / 0-)
      Recommended by:
      Tasini, lams712

      I too hope you're right.  I'm still looking for principled stands on civil liberty (habeous corpus, warrantless wiretaps, patriot act) as well as on the war and economic liberty.

      "A revolution without dancing is a revolution not worth having"

      by Mensor on Fri Sep 07, 2007 at 08:14:45 AM PDT

      [ Parent ]

    •  DHS (3+ / 0-)
      Recommended by:
      Tasini, Mensor, kurt

      You may be right that our Dem leaders will do the right thing here. I certainly hope so.

      But as you appear to be a bit of an "insider" perhaps you can carry this message into the bubble: people out here in the regular world are shocked, scarred, and traumatized by the waffling weakness of our Congressfolks and Senators on Iraq, FISA surveillance, WH stonewalling of subpoenas, and the utterly incomprehensible choice to avoid impeachment proceedengs. I'd say they are running away like little girls, but that would be insulting to little girls.

      What you see in this diary may be a kind of PTSD reaction. You know how in the streotype version, the traumatized vet dives under the table at the sound of a car backfiring on the street? Maybe that's what's happening here.

      The leaders of our party are losing the confidence of their most ardent supporters, while gaining the confidence of no one. What the hell kind of strategy is that?

      We need our representatives to find their ground, stand on it, and put up a f*ing fight, g'dammit.

      And tell 'em this too, please: The most important thing is not if we "win", what matters is if we fight. There's nothing weaker than a party that won't fight for what it knows is right. The voters are looking for strength. Do you see the connection here? If we want to win in 08, we gotta be fighting NOW!

  •  I think Rangell is trying to tie (1+ / 0-)
    Recommended by:
    lams712

    this loophole elimination to AMT tax reform, which would be a great idea.  That way it can be sold as a tax cut to the middle class.

  •  Taxing carried interest (2+ / 0-)
    Recommended by:
    kurt, DBunn

    Senator Charles Schumer has stated that he would be willing to review the issue of taxing carried interest at ordinary earned income rates, rather than at capital gains rates, if it applied to all partnerships.  He did not think it was equitable to single out private equity and hedge funds for a different standard than other investment vehicles formed as partnerships including real estate, oil & gas, and movie production to name a few.  This issue has received a lot of publicity because of the success of private equity and hedge funds in recent years and the returns to both investors and fund managers.  Carried interest, the share of profits distributed to fund managers, has always been treated as a capital gain and the funds are very carefully structured under IRS rules to qualify for capital gains treatment.  Fund managers regular monthly income, taken as a salary or partership draw, is taxed at ordinary earned income rates.

    The issue of how to tax carried interest is a welcomed public policy question, but some have characterized it as a loophole or an enforcement issue, which it is not.

    The chance of changing the tax treatment in this Congress is slim, it will never have 60 votes in the Senate and if passed Bush would veto it. It could be attached to some other critical legislation, which would improve the odds.

    It has stirred a sleeping giant, however, as the major fund managers have formed a trade group to fight the proposed change.  This is a community with very deep pockets, and lots of smarts, that has decided to become more politically active 2008.
     

    "let's talk about that"

    by VClib on Fri Sep 07, 2007 at 08:09:11 AM PDT

    •  I don't buy it. (1+ / 0-)
      Recommended by:
      Tasini

      I have yet to see a reasonable technical argument for taxing managers on their personal 1040 at cap gains rates.

      The issue at stake has nothing to do with partnership structure, and everything to do with natural individuals committing tax fraud.

      Feel free to give me an argument to the contrary, though; I'd like to believe that people that differ on the matter aren't all in bad faith.

      •  The technical argument (4+ / 0-)
        Recommended by:
        burrow owl, kurt, phidda, VClib

        goes like this:

        The income in the hands of the hedge fund is capital gains and if allocated to the investors in the hedge fund would be capital gains.

        The partnership agreement, however, is reallocating the income from the hedge fund investors to the hedge fund managers.  The income and its source are still the same however; therefore, the tax treatment should not change merely because it has been allocated from one person to another as it is still gains from the disposition of capital assets properly taxed at capital gains rates.

        (There are certainly counterarguments, but this is roughly the technical argument and seems to be generally accepted among tax professionals and the IRS as accurately reflecting the current state of the law.)

        •  Re-allocation of investment income? (1+ / 0-)
          Recommended by:
          kurt

          I can see how that argument would be attractive to people who would benefit unfairly if it were accepted.

          To me, however, it looks more like the investors are paying the hedge fund manager for his/her services.

          What matters is not the source of the money, but how it is used. In this case, it is being paid out to the hired help. Within the frame of the managers' tax obligations, that looks like earned income to me.

        •  So we can allocate those gains (1+ / 0-)
          Recommended by:
          kurt

          to the secretary, the janitor, etc., and they'd all pay cap gains.

          That doesn't make sense, of course, because those people never had an equity stake in the capital.  The income to them is fee for service, and that arrangement transforms the money from cap gain to regular income.  Same thing with the manager, ergo it's regular income.  

          Thanks for laying out the argument, though; it strikes me as weak, but whatevs.  I'm just glad someone finally explained it. (that for no shortage of asking)

          •  Yes, you could (0+ / 0-)

            Fund managers have wide latitude in allocating the carried interest.  It does not need to be allocated on the basis of the ownership of the firm or the capital contribution to the fund. So yes, the carried interest which is capital gain income, as distinct from salary, is allocated broadly in most of these firms.  While the senior executives take the lion's share, carried interest does include secretaries at some firms.

            "let's talk about that"

            by VClib on Fri Sep 07, 2007 at 10:48:03 AM PDT

            [ Parent ]

    •  the politics (3+ / 0-)
      Recommended by:
      Mensor, kurt, DBunn

      I imagine you are right about the 60 votes. But, that doesn't mean Democrats can't and shouldn't stand united on the issue and, frankly, make it a political issue in the elections. As I said, I'm all for making sure that all these partnerships pay 35 percent (at the very least). You may be right that it is not a "loophole" technically--but if I'm a voter out there it sure seems like a dodge from paying the higher rate.

  •  Dems can't capitulate? (0+ / 0-)

    Just watch them!  Its the only thing they're good at.  They've raised it to a competitive art form, kinda like synchronized swimming or rhythmic gymnastics...

    Open the pod bay doors, HAL.

    by Minerva on Fri Sep 07, 2007 at 08:53:31 AM PDT

  •  A wonderfully wonky analysis (0+ / 0-)

    Here.  Fairly complicated stuff, so probably only for the die-hard tax policy weirdos.

    •  This wonky analysis tracks my intuition, FWIW (0+ / 0-)

      To the extent the manager / GP gets capital in exchange for his/her/its service, that capital is fee-for-service and regular income (which can be taxed at a some future taxable event).  The unrealized income on that capital can be fairly characterized as cap gain.  

      So if the manager earns 2MM for his fee and then lets it sit until it becomes 5MM, we should treat the initial 2MM as regular income and the realized gain of 3MM as capital gain.

  •  Excellent discussion. (0+ / 0-)

    We can not say we stand for economic justice if Democrats ignore this.

    Every solicitation for funds to DSCC or DCCC gets sent back (in their postage paid envelope) with

    No! because
    Hedge fund taxation
    Habeus Corpus
    FISA allowing spying
    NOT FIXED!
    Not a cent until you fix them.

    sam
    I was going to put down Lieberman but that's not something they can act on.

    Impeachment? Only when some Rethugs aboard. Pelosi/Reid can only pass measures they have the votes for. Write/call all: 800-828-0498

    by samddobermann on Sat Sep 08, 2007 at 11:25:01 PM PDT

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