Tag Archives: Campaign Finance

A Tax Break That Will Never Die

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Democrats are on the verge of passing a major bill that will attack the climate crisis, expand healthcare, slow down inflation, reduce the deficit, and even deal with tax evasion. In order to get all fifty Democratic senators to support the bill, a piece of the bill that would have raised taxes on a small number of very wealthy people was dropped. It’s a classic example of the way money corrupts American politics. From The New York Times:

Once again, carried interest carried the day.

The last-minute removal by Senate Democrats of a provision in the climate and tax legislation that would narrow what is often referred to as the “carried interest loophole” represents the latest win for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills that aimed to end or limit a quirk in the tax code that allows executives to pay lower tax rates than many of their salaried employees.

In recent weeks, it appeared that the benefit could be scaled back, but a last-minute intervention by Senator Kyrsten Sinema, the Arizona Democrat, eliminated what would have been a $14 billion tax increase targeting private equity.

Lawmakers’ inability to address a tax break that Democrats and some Republicans have called unfair underscores the influence of lobbyists for the finance industry and how difficult it can be to change the tax code….

On Friday, the private equity and hedge fund industries applauded the development, describing it as a win for small business [of course they did].

“The private equity industry directly employs over 11 million Americans, fuels thousands of small businesses and delivers the strongest returns for pensions,” said Drew Maloney, the chief executive of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state across our country”….

Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent [so the people who manage these small investment firms take around 20% of the firm’s investment profits as their salaries, not because they invested their own money but because they expect to be paid for their labor].

Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent….

An agreement reached last week by Senator Joe Manchin III, Democrat of West Virginia, and Senator Chuck Schumer of New York, the majority leader, would have [made it more harder for the managers of these firms] to take advantage of the lower 20 percent tax rate.

But Ms. Sinema, who has received political donations from wealthy financiers who usually donate to Republicans and who was cool to the idea of targeting carried interest last year, objected.

In the past five years, the senator has received $2.2 million in campaign contributions from investment industry executives and political action committees, according to OpenSecrets, a nonprofit group that tracks money in politics. The industry was second only to retired individuals in giving to Ms. Sinema and just ahead of the legal profession, which gave her $1.8 million. Executives of some of those firms have made campaign contributions to Ms. Sinema, including George Roberts, Henry Kravis and Joseph Bae at KKR and Sean Klimczak and Eli Nagler at Blackstone.

For years, carried interest has been a tax policy piñata that never cracks open.

During the 2016 presidential campaign, D____  J. T____ said, “We will eliminate the carried interest deduction, well-known deduction, and other special-interest loopholes that have been so good for Wall Street investors and for people like me but unfair to American workers.”

When President Biden ran for president in 2020, his campaign said he would “eliminate special tax breaks that reward special interests and get rid of the capital gains loophole for multimillionaires.” To do that, he said, he would tax long-term capital gains at the ordinary top income tax rate, essentially wiping away the special treatment of carried interest.

A similar proposal appeared in Mr. Biden’s budget last spring, but, as Democrats tried unsuccessfully to pass their Build Back Better legislation in the summer and fall, carried interest disappeared.

Jared Bernstein, a member of the White House’s Council of Economic Advisers, lamented that outcome. “This is a loophole that absolutely should be closed,” Mr. Bernstein told CNBC last September. “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”….

Opinions on the carried interest tax treatment vary even within the financial industry. In posts on Twitter in late July, Bill Ackman, the founder of Pershing Square Capital Management, a New York hedge fund, said that while “favorable tax treatment” for the founders of new businesses was essential, people who manage funds that own many companies should not be entitled to the same benefit.

“The carried interest loophole is a stain on the tax code,” he wrote in one post. “It does not help small businesses, pension funds, other investors in hedge funds or private equity and everyone in the industry knows it. It is an embarrassment and it should end now.”

Some analysts were skeptical all along that lawmakers would actually change the carried interest tax treatment in the final bill. While it has become a high-profile target, the change Democrats were seeking would have raised little tax revenue compared with other provisions in the legislation, known as the Inflation Reduction Act….

“The proposal that was in the bill until last night made a technical adjustment [regarding] assets that qualified for carried interest treatment,” said Jean Ross, a senior fellow at the Center for American Progress, a liberal research group in Washington. “A better approach would tackle the issue head-on and say that compensation for services managing an investment fund should be taxed like work and subject to ordinary tax rates”….

Ms. Sinema herself has said little about why she considered it so important to preserve the carried interest tax treatment [could that possibly mean she has no good reason for doing that?]. She has said that she plans to work on legislation with Senator Mark Warner, Democrat of Virginia, to address the loophole. But if the legislation is not included in the current package, which is being fast-tracked under an arcane budget process, any reform will require support from at least 10 Republicans [which everyone, including Sinema, knows will mean nothing is done, since Republican politicians don’t like rich people to be taxed].

“I think we reached agreement that there are areas where there’s been abuse,” Mr. Warner said in an interview, adding, “I’m disappointed it didn’t get in this bill, but I’m looking forward to working with Senator Sinema — and others — to see if we can address this [news flash: you can’t and you won’t address it].

Unquote.

To summarize, if you’re an accountant that works at one of these firms, you get a salary and pay income tax at the rate for regular income. If you’re a customer at one of these firms and your investment did well, the profits you get are taxed at the lower rate for capital gains. If you run the firm, you take some of the profits from your customers’ investments as your compensation, but the government taxes your compensation as if you made the investment with your own money, so you get to pay significantly less income tax. If Democrats try to fix this absurdity, Republicans and even some Democrats will stand in the way, while you claim that your compensation should be taxed at the lower rate because, well, because your customers get the lower rate and the investments you make help other businesses (while sometimes destroying others).

Which shows once again that too many politicians work for their donors, not the people they represent.

Money and Politicians, Plus Judges

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ThinkProgress reports that the Supreme Court sensibly ruled, in a 5-4 decision, that a state can restrict lawyers’ campaign contributions to judges. Chief Justice Roberts explained why:

States may regulate judicial elections differently than they regulate political elections, because the role of judges differs from the role of politicians. Politicians are expected to be appropriately responsive to the preferences of their supporters. Indeed, such “responsiveness is key to the very concept of self-governance through elected officials.” The same is not true of judges. In deciding cases, a judge is not to follow the preferences of his supporters, or provide any special consideration to his campaign donors. A judge instead must “observe the utmost fairness,” striving to be “perfectly and completely independent, with nothing to influence or control him but God and his conscience.” As in White, therefore, our precedents applying the First Amendment to political elections have little bearing on the issues here.

So a majority of the Court agreed that it’s important for judges not to be influenced by campaign contributions, because judges are expected to serve the public good. Does that mean it’s acceptable for politicians to be influenced by campaign contributions, since they’re expected to serve the interests of whoever gives them money?

The obvious problem with Roberts’s explanation is that politicians should serve the public good as much as judges. A President is supposed to serve the national interest. Senators are supposed to serve the national interest and the interests of their particular states. Politicians are only supposed to do little favors for people who give them money. Otherwise, we’d say the politicians were for sale!

After all, we vote anonymously so that nobody, not even the candidates, know who we voted for. That makes sense, because how a particular person voted shouldn’t matter to a politician who represents “the people”.

But doesn’t that suggest that campaign contributions (assuming they’re legal at all) should be anonymous too? Politicians shouldn’t know who gave them money or spent money on their behalf, because they’re not supposed to be influenced by such things. They’re supposed to make their decisions on the merits, not reward the rich people or groups who paid for their campaigns. Nor should politicians be able to extort contributions by threatening anyone.

Anonymous campaign funding was the subject of a 2004 book called “Voting With Dollars” written by two law professors. They argued that all voters should be given government-financed “gift cards” that could only be used to finance presidential campaigns. Last year, two political scientists called for making all campaign contributions anonymous, even those made by major donors:

Indeed, if we think about all the ways transparency helps contributors and candidates put pressure upon each other, it is clear that reporting contributions can make matters worse. Suppose, then, that we turned out the lights? What if we let Adelson and Shaun McCutcheon spend their money on politics but not take credit for their “generosity”? What if we made all campaign contributions and independent expenditures anonymous — and made sure they stayed anonymous?

I don’t know if it’s possible to design a system that would guarantee anonymity. If people contributed to a general fund from which payments were made to their candidates of choice, it would be difficult for the contributors to see that they’d made a specific contribution to a particular candidate without their having the ability to share that information with the candidate in question. Maybe it would be enough to make it illegal to communicate the source of donations or “independent” spending, as the political science professors suggest.  

In addition to reducing the number of favors politicians did for their major contributors, anonymity would theoretically reduce the amount of money in politics too. Presumably, some of the wealthy would limit their spending if they couldn’t expect something in return. Of course, even anonymous contributions won’t solve the Big Money problem. Fixing that will require a majority on the Supreme Court that doesn’t equate unlimited political spending with free speech.

Republicans on Supreme Court Make Plutocracy Official

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In their latest effort to make America’s status as an oligarchy (sub-class plutocracy) official, the five Republicans on the Supreme Court have now decided that wealthy people will be able to give as much money as they want to political parties and groups of candidates. According to the New York Times, the Republicans ruled that:

Overall limits of $48,600 by individuals every two years for contributions to all federal candidates violated the First Amendment, as did separate aggregate limits on contributions to political party committees, currently $74,600.

So, rich people will now be able to give millions of dollars every two years to the political party of their choice, without going to the trouble of setting up supposedly independent political action committees. In addition, rich people will now be able to give millions of dollars directly to candidates every two years, so long as they don’t give any candidate more than $2600 for a single election.

The $2600-per-election limit wasn’t killed off today, but it will be eliminated as soon as the Republican justices gets their chance. That’s because the Republicans on the Court claim, in the Chief Justice’s words, that “there is no right in our democracy more basic than the right to participate in electing our political leaders.” And by “participate”, of course, the Court means “use one’s financial resources to elect and influence as many politicians as possible”.

It’s now official, therefore, that the most basic right in our democracy is no longer the right to vote, a right that should belong to rich and poor alike. Now the most basic right is to “participate”. Anatole France once pointed out that “in its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets, and steal loaves of bread.” In the same way, the law in the United States now allows rich and poor alike to give millions of dollars to the candidates of their choice and buy as much political advertising as possible, all in the name of freedom of speech.

Treat money as speech, discourage low-income voters from voting (as Republican politicians are doing in every state they control), and do whatever possible to encourage financial inequality (let’s get rid of the death tax!). It’s an amazingly clear agenda. Replace government of the people with government of the few and make sure the few are the rich!