Tax Fairness Advocates Fire Back at Lobbyists for Investment Managers

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Members of Congress returning to Washington this week were greeted with a call from over three hundred non-profits, unions, and faith-based groups to end the "carried interest" tax loophole that vastly reduces the tax bills of certain millionaires and billionaires in the investment industry.

Legislation (H.R. 2834) proposed by Rep. Sander Levin (D-MI) would eliminate this loophole. Several progressive national organizations and unions have begun their own lobbying campaigns in support of the Levin bill.

A letter applauding the Levin bill was signed by the 300 groups from every state and was sent to members of Congress earlier this week. The letter argues that "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."

General partners in private equity funds and other types of funds invest other people's money and are often paid huge sums for their services. Part of this pay is in the form of "carried interest," which is a share of profits. The loophole allows the general partners to pay the low, 15 percent rate for capital gains on their carried interest, even though they have not contributed capital and do not own the capital assets.

Private Equity Industry Working Hard to Defend the Indefensible

Lobbyists from the private equity industry descended upon House and Senate offices as soon as the Levin bill was introduced. The industry has produced a bewildering variety of arguments, often contradicting themselves, to defend this loophole over the past several months. This pattern continued on Thursday, when the Senate Finance Committee held its third hearing on the issue and the House Ways and Means Committee held a day-long hearing on tax fairness issues, including the carried interest loophole.

Representatives for the private equity industry have at times argued that they are developing companies through their hard work, implying that they deserve a tax break for this reason. At other times they have argued that their carried interest is not pay for work, to justify being taxed as if they have capital gains. They have at times argued that pensioners will suffer if the loophole is closed because the fund managers will find the tax increase so odious that they will no longer have an incentive to provide investment management services to pension funds. At other times they have argued that they'll just pass the tax increase onto pensioners and other investors, which would suggest that they won't find anything at all odious about the tax increase and that they should be indifferent to it.

Public employee pensions, which often invest a small portion of their assets in private equity, have generally not joined the private equity industry's side in this debate.

One novel argument made by the industry is that the carried interest loophole helps African-American and ethnic minorities accumulate assets. It's difficult to imagine how this argument could be effective. Three of the co-sponsors for the Levin bill are members of the Congressional Black Caucus, including Ways and Means chairman Charles Rangel. Chairman Rangel hopes to make legislation to close the carried interest loophole, and possibly other unnecessary tax loopholes, part of a larger bill that would reform the Alternative Minimum Tax.

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