Could A Battle Over The Carried Interest Loophole Determine Sean Duffy's Political Fate In Northwest Wisconsin?
You've heard about carried interest right? Do you understand what it is and why the carried interest tax loophole has to be shut down? After reading this OpEd from venture capitalist Alan Patricof in the NY Times over the weekend, I wish the loophole could be shut down retroactively and the billions of unpaid taxes by crooked Republicans like Robert Mercer, Steven Cohen, John Paulson and Paul Singer and crooked Democrats like John Arnold and Donald Sussman could be collected-- with penalties. As Patricof explains, "carried interest" is not an investment or a risk that needs to be rewarded. It's basically another form of a management fee that gets taxed at a much lower rate. It's the performance fee money managers charge to manage other people’s money. "Carried interest is the fund manager’s share of the earnings from a profitable investment, normally paid on top of a much smaller management fee." Almost all the candidates this year followed Bernie in denouncing it and pledging to close the loophole, from Jeb and Señor Trumpanzee to Hillary herself. In fact, Hillary "has vowed that if Congress does not close the loophole, as president she would ask the Treasury Department to use its regulatory authority to do so."
Ultimately, the controversy has to do with tax fairness, or the lack thereof. Instead of being taxed as wages or commissions earned, carried interest is currently taxed as if it were a personal investment, or capital gains. This gives us a significant tax advantage since the capital gains tax rate is about 50 percent lower than the top rate on ordinary income.Sean Duffy (R-WI) is an especially heinous member of Congress when it comes to serving the interests of the Wall Street banksters who pay him off rather than his own middle class constituents in Wausau, Superior, Marshfield, Rhinelander and Iron Mountain. We asked his progressive Democratic challenger, Mary Hoeft if we were missing something. "My opponent," she told us, "is Wall Street's best friend. He chairs a banking oversight committee and yet, found no ethical problem in accepting $300,000 in political contributions from bankers. In payback for that generous contribution, he authored legislation intended to cripple the Consumer Financial Protection Bureau, the agency shaped by Elizabeth Warren and others to make sure that Big Banks are never able to bring our economy to its knees again. More than 7 million Americans lost their homes to bankruptcy. Does Sean Duffy care? No. Does he care if taxation is soft on the wealthy and hard on ordinary middle class working families in Wisconsin? No. Wall Street has a fulltime lobbyist working for them, whose name is Congressman Sean Duffy. It's time for a change! The people of the 7th Congressional District deserve a representative who will work for them."
When I started my first fund, Alan Patricof Associates, in 1970, I vividly remember my accountant telling me about my first sale of an investment: “We’re going to treat this as capital gain, but sooner or later, it will be characterized as ordinary income.”
That was 46 years ago-- and virtually nothing has changed.
Other countries have taken action: Britain recently recognized the wisdom of doing away with the special tax treatment of carried interest by maintaining a much higher tax rate on such income. But not the United States.
It is past time for that to change, and for fund managers like myself to accept the reality: We should not be receiving a tax break meant for investors when our work does not involve the risk of our own investment of capital.
As the former Treasury secretary Larry Summers once said of carried interest, “Rarely has a policy existed so long with such weak arguments in its favor.”
The capital gains tax benefit was originally created for people who invested with their own capital at risk. It was established as an incentive for investors to take greater risk than they would with their ordinary income. But because of the nature of our work, carried interest does not merit that incentive.
...According to the Congressional Joint Committee on Taxation, carried interest costs the American people nearly $2 billion in tax receipts every year. While eliminating the carried interest advantage would make only a small dent in the national debt, it would send a meaningful message to the American people.
Most important, it comes back to a question of fairness. Our current political and cultural environment is marred by a toxic belief that the country’s economic order is rigged against ordinary Americans-- that the world of high finance unjustly supersedes their rights, needs and wants.
A new report by Gallup found that 86 percent of Americans agreed that members of Congress paid too much attention to what their major financial contributors wanted them to do. It feeds the cynicism that is fraying our democracy.
“Congress’s harshest critics,” Gallup reported, “feel more strongly about the undue influence that donors and lobbyists have on Congress than they do about any other major criticism of the institution.”
For that reason alone, my fellow venture capitalists and private equity investors should support the closing of the carried interest loophole: It would carry great symbolic weight.
There needs to be a more realistic attitude from those of us who have benefited from the carried interest loophole for too many years.
We need to demonstrate a little more patriotism, and a greater sense of fairness, even if it affects our pocketbooks.