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.
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.