Call your Senators and tell them to stop putting multi-millionaire investment fund managers ahead of struggling families.

Call the Capitol switchboard at 202-224-3121 and ask to be connected to the Senators for your state.

Democrats in Congress are rushing to pass the jobs and "extenders" bill before the end of the week. This bill includes extensions of badly needed unemployment insurance and COBRA health benefits, TANF jobs and emergency funding, Medicaid funding for states and several other important measures. These are the type of measures that many economists, like Mark Zandi of Moody's, believe will help stimulate the economy and speed up the recovery. The bill may be passed in the House this week.

Even if the bill passes the House, there may be a serious roadblock in the Senate. Some Democrats in the Senate may oppose or slow down this bill because it includes a provision to clamp down on a loophole allowing investment fund managers to earn hundreds of millions of dollars each year and yet pay taxes at a lower rate than their secretaries.

In other words, some Senate Democrats (and all or most Republicans) would allow unemployment and health benefits to expire for out-of-work families, and would allow jobs funding and Medicaid funding to expire, all to protect a loophole that allows multi-millionaires to pay taxes at lower rates than middle-income people. With every (or nearly every) Republican Senator guaranteed to vote against the bill, the Democrats are struggling to remain unified.

(See CTJ's recent report about the tax loophole-closers in the bill.)

If there was ever a time to call your Senators and give them hell, this is it.

The bill in question is H.R. 4213, the jobs and "extenders" bill. The loophole in question is the infamous "carried interest" loophole that allows wealthy fund managers to pretend that some of the compensation they receive in return for managing other people's money is capital gains. (See CTJ's recent report about carried interest.)

Compensation for work is almost always taxed at ordinary rates as high as 35 percent and subject to payroll taxes of around 15 percent. But this loophole allows the investment fund managers (who can earn hundreds of millions of dollars a year) to pretend that some of their compensation is capital gains, which is subject to an income tax rate of just 15 percent and is not subject to payroll taxes at all.

After the Bush tax cuts expire at the end of this year, the top tax rate for "ordinary" income (meaning income subject to ordinary income tax rates) will go from 35 percent to 39.6 percent and the top rate for capital gains will go from 15 percent to 20 percent. That means that if this loophole is not closed, investment fund managers will be able to cut their income taxes roughly in half from what they should be paying, and will still avoid payroll taxes.

Democratic leaders have already compromised on this issue. Instead of treating all carried interest as "ordinary" income (i.e. not capital gains) as previous House-passed bills would do, the current proposal would treat 75 percent of it as ordinary income.

Incredibly, this has not been enough for some Senators who want to further weaken the provision.

Keep in mind that this has nothing to do with changing the taxation of anything that can honestly be called investment income. The idea behind the tax preference for capital gains is that it encourages people to invest. This is nonsense for reasons we'll get into on another day, but it is the accepted wisdom among many lawmakers who don't have much time to think about economics. But even if we accept this premise, it does nothing to explain why this tax preference should be enjoyed by people who are not investing their own money but merely managing other people's money. That's what the carried interest loophole currently allows.

Five Senators (Scott Brown, Jeanne Shaheen, Bob Casey, Patty Murray, Mark Warner) signed a letter to Finance Committee Chairman Max Baucus asking to amend the provision to allow venture capital fund managers to continue to enjoy the loophole.

The basic idea is that venture capital firms create innovation and jobs, unlike some of the other types of investment managers (like hedge fund and buyout fund managers) and this type of investment needs to be encouraged. The letter does not explain why this calls for tax breaks allowing the people who manage the money (not the people putting up their own money) to pay taxes at lower rates than middle-income people.

It has also been rumored that the venture capital industry has put a great deal of effort into persuading the Senators from California, Barbara Boxer and Dianne Feinstein to resist the provision.

Senators Maria Cantwell, John Kerry and Robert Menendez have also voiced concerns. Kerry and Menendez have called for some sort of "compromise" so that investment fund managers do not have to entirely pay at ordinary rates on their carried interest. This could involve taxing a smaller portion of carried interest as ordinary income (taxing less than 75 percent of it as ordinary income).

Another idea being floated would allow for investment managers to continue to enjoy a loophole to the extent that the investments they manage are held for a certain number of years. The idea seems to be to reward "patient" capital rather than those trying to make a quick buck. But of course, this really has nothing to do with rewarding patient capital since it would benefit the people managing the money, not the people actually investing it. Even more alarmingly, it could actually delay certain investments if fund managers are encouraged to hold onto assets for a longer period of time than would otherwise make sense just to enjoy the tax break. Certain deals would be delayed, meaning this provision could actually slow down economic development and job creation.

Staffers for several other Democratic Senators also expressed concerns about the carried interest provision, which seems to mean that ALL Senators need to hear from their constituents on this issue.

No one has explained why making the people who manage investments pay taxes at the same rate as everyone else will discourage investment. The argument that is occasionally trotted out by the industry is that the people managing the money and investments will have to charge more for their services in response to a tax increase. This is simply not true. If they could charge more, they would already being doing that right now. And it's worth remembering that investment fund managers did not decide to charge less when their tax rates were reduced (in 1997 and 2003 when the capital gains rates were cut) so it's illogical to believe that they will charge more in response to a tax increase.

The only explanation for the Senate's resistance that readily comes to mind involves the campaign contributions that investment fund managers make. Senate Democrats are, frankly, in danger of creating an extremely unflattering impression of themselves as beholden to their wealthiest contributors.

Many who have been following this bill are extremely concerned that the Senate may not pass the bill this week, or may pass the bill after amending it to reduce the impact of the carried interest provision. An amended bill could be disastrous in that it might make it impossible for the two chambers to come to agreement and send a bill to the President before the Memorial Day recess.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog,

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