Also referred to as ‘carried interest’, it is a loophole that allows the wealthiest people in America including hedge fund executives and private equity managers to pay a tax rate that is almost the same as others and get tax breaks. It costs the country $180 billion a decade.
It is a practice that has endured many administrations including Obama and Trump, and Robert Reich, an economist wonders why Democrats did not close the loophole in order to support President Joe Biden’s Build Back Better Package
“After all, closing it could raise $180 billion over 10 years. That’s $180bn that could go toward supporting vulnerable Americans and investing in America’s future,” Reich wrote.
“Think again. The loophole – which treats the earnings of private equity managers and venture capitalists as capital gains, taxed at a top rate of just 20%, instead of income, whose top tax rate is 37% – remains as big as ever. Bigger.”
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But no one can explain why Presidents could not close the loophole.
According to Reich, Richard Neal, who’s in the House Ways and Means chair argues that closing the loophole would hobble the private equity industry, and, by extension, the US economy. Neal’s ways and means committee want only to require private equity firms to hold assets for slightly longer than they do now in order for their managers to qualify for the loophole.
“I don’t know what happened,” said Larry Kudlow, the conservative economist who crafted Trump’s campaign tax plan. “I don’t know how that thing survived,” he said, adding, “I’m sure the lobbying was intense.”
The sole reason the loophole survives even during Democratic Congresses is fierce lobbying by the private equity industry – and the dependence of too many Democrats on campaign funding from the partners of private equity and hedge funds.
“This is a loophole that absolutely should be closed,” said Biden adviser Jared Bernstein. But “when you go up to Capitol Hill and you start negotiating on taxes, there are more lobbyists in this town on taxes than there are members of Congress.”
Private equity firms spend millions of dollars to get lobbyists to prevent efforts to change tax policies that negatively affect it. Analysis by the New York Times this year found that private equity firms contributed over $600 million to congressional campaigns in the last decade.
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In 2010, Democrats who controlled the Senate put a brake on the effort of House Democrats to close the loophole. Senator Charles Schumer was among those who argued against closing it. The United States, he said, “should not do anything” to “make it easier for capital and ideas to flow to London or anywhere else”.
“As if Wall Street needed billions in annual bribes to stay put,” Reich said.
