Bus Drivers Shouldn't Pay More Taxes Than Millionaires

Way back in 1985, President Ronald Reagan outlined a very simple principle of tax fairness during a speech at Northside High School in Atlanta, Georgia.

Loopholes that allowed millionaires to pay less in taxes in bus drivers, he said, were crazy

That was one of the few times Ronald Reagan was right about something, which makes it all the more amazing that 31 years later, one of the crazy loopholes he was talking about is still one the books.

I’m talking, of course, about the carried interest loophole.

Although it has its origins in the 20 percent profit on goods that ship captains demanded in the medieval glory days of sea trade, the carried interest loophole is today just another carve-out for banksters.

Here’s how it works: Let’s say you’re a hedge fund manager and you’re in charge of a massive hedge fund worth billions, of dollars. You, as the hedge fund manager, have a choice of the way you make your money. You can either take it home in the form of a fee or you can take it in the form of a percentage of the profits accrued from the investments your fund makes.

If you choose to take home your money in the form of a fee, it’s taxed at the top income tax rate of 39.6 percent.

But if, on the other hand, you decide to take your money home in the form of profits -- carried interest -- it’s taxed as capital gains, at around 23.8 percent, a huge tax saving for the billionaire hedge fund managers.

In other words, even though the money you’re taking home is for all intents and purposes your income, a glorified accounting trick turns it into something else, and your tax bill is a lot smaller as a result.

Now, this isn’t totally crazy.

The original idea here was to protect people who invested their own money in risky ventures.

But that’s not how things work these days.

There are now so many protections in place for hedge fund managers and general partners that the risk they face is very, very minimal.

Giving them a tax break to protect against “risk” is redundant, not to mention costly for the rest of us.

Even though it only benefits about 2,000 people every year, the carried interest loophole costs taxpayers – you and me – about $2 billion in lost revenue every single year. Closing it, some studies have found, could bring in as much $18 billion over 10 years.

This just common sense, even some banksters themselves know that.

Writing in the New York Times this weekend, Alan J. Patricof, the co-founder and managing director of venture capital firm Greycroft, called on Congress to close the carried interest loophole once and for all.

He called it an issue of fairness, which it obviously is.

But there’s another aspect to the carried interest loophole that’s rarely discussed: that hedge funds themselves are often dangerous.

They destabilize the economy, and feed off the rest us, often ripping off working people to make money.

The don’t build anything; they’re essentially parasites, and the carried interest loophole often encourages people to join a profession that can pose a big risk to the rest of the economy.

It’s time to repeal the carried interest loophole for both these reasons. And then let’s begin a discussion about regulating or redefining hedge funds to limit the damage they can do to our economy.

Comments

chuckle8's picture
chuckle8 5 years 50 weeks ago
#1

I agree with what Thom says, except he forgot to mention that 39.6% should be 83% (per PIcketty).

The other concern I have is the use of the word loophole. Since there are good loopholes, people might reject them just because someone calls them a loophole.

A prime example of a good loophole is giving a tax credit to corporations that bring jobs back to the US.

The Other Katherine Harris's picture
The Other Kathe... 5 years 50 weeks ago
#2

Thanks for the history, Thom! I had no idea where this concept came from.

That you never stop at just "enough" on any topic is what makes you the ultimate educator among progressive pundits. Learning from you since the early days of Air America has been a continuous delight.

Thanks also for your immeasurably valuable role in bringing Bernie Sanders into the spotlight. What a difference you made to the world via "Brunch with Bernie".

Bravo, You!

cccccttttt 5 years 50 weeks ago
#3

Why will congress give up their power to create loopholes when granting loopholes to business in return for cash is how they get their campain funds>

ct

EvilRichGuy's picture
EvilRichGuy 5 years 50 weeks ago
#4

Hillary is not likely to do anything that cuts the income for investment banking firms. Look at where the money is coming from for her campaign, and who the donors are to her "foundation." Forget what she says and focus on what she is likely to do.

If you seriously want loopholes closed pick the candidate who the investment banking firms are fighting against, not the one who they own.

chuckle8's picture
chuckle8 5 years 50 weeks ago
#5

I want good loopholes.

Qoheleth 5 years 49 weeks ago
#6

I want to know why it is that the money you earn from your own labor is taxed at a higher rate than the money you sit back and rake in from other people's labor (hedge funds, capital gains, inheritances, dividends, etc.)?

I wrote and asked the Congressman from this district, Mark Meadows, about this, but all he sent back was a mindless regurgitation of talking points about the "death tax."

EvilRichGuy's picture
EvilRichGuy 5 years 49 weeks ago
#7

Quheleth: Capital gains were created as a way of encouraging the long-term holding of assets. I don't know what was in the minds of the politicians when the concept was created, but am guessing that the primary focus was on stock ownership and home ownership. Essentially a lower tax rate is given on investments that are held for over a year. It adds a bit of stability to the market as well as encourages homeowners to hold on to their homes for the long-term, effectively saving for retirement.

Unfortuntately, smart people have found ways to "lock in profits" and beat the system. (Big short-term winnings can be hedged.)

Today's tax system is overly complex, and as you said, does wacky things at times. It needs completely redesigned with a goal towards simplicity and fairness. The problem is that it is an enormous system with a huge amount of momentum, and will take decades to overhaul (If ever.) Plus ... Wall Street has a fair amount of money and owns a fair number of politicians. What's the chances they'll increase their own tax burden, or give money to candidates who will do so? Perhaps Trump will be elected and make some radical changes, but realistically, I'm guessing that nothing significant will change anytime soon.

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