The views expressed by contributors are their own and not the view of The Hill

What the carried interest tax loophole reveals about our corrupt political system

Running a government that works for 300 million Americans is expensive. Running a corrupt American government is unsustainable.

There is no more striking example of the cost of corruption than tax loopholes that benefit the 1 percent of the 1 percent.

{mosads}In 2014, the top 25 hedge fund mangers made more money than every single kindergarten teacher in America. Yet, because of the “carried interest” tax loophole those 25 people actually paid a lower tax rate. To put it more starkly, individuals making more than $450 million a year on average are taxed at a lower rate than teachers making around $50,000 on average.

Carried interest allows money managers to treat much of their fees on their clients’ investments as capital gains, which are taxed at a maximum rate of 23.8 percent instead of the 39.6 percent rate applied to ordinary income. At a time when wages for working people have stagnated at 1990 levels, it is an outrage for a small group of hedge fund operators to have their income taxed at a lower rate.

Closing the carried interest loophole would be an important step toward a more economically equitable America.

Taxing carried interest at ordinary income rates would raise $18 billion over 10 years, according to a Treasury Department estimate. Other tax experts say it would actually generate closer to $180 billion in revenue.

That’s just enough to cover the shortfall in the Highway Trust Fund. That’s half the cost of guaranteeing every worker paid family and medical leave. With that money we could ensure every child – rich or poor – has the opportunity to attend a pre-K program.

But when Wall Street has unlimited access to politicians because of campaign contributions, Main Street America travels on crumbling roads and bridges, working mothers give birth one day and are back in the office the next, and children in lower and middle class families miss out on critical education in their formative years.

President Obama last week renewed his call on Congress to do away with this indefensible tax break ahead of the next budget showdown at the end of the month. Leading presidential candidates in both parties – Hillary Clinton, Donald Trump, and Jeb Bush – advocate closing the loophole and taxing capital gains as regular income.

But bi-partisan opposition also runs deeps. Last year then-Rep. Dave Camp (R-Mich.) proposed a sweeping tax reform plan that included treating carried interest as regular income. The plan was dead on arrival. In 2010, the House passed a bill closing the loophole, but it was scuttled in the Senate by members of both parties with strong ties to Wall Street.

In 2012 and 2014, financial interests spent more than $1.1 billion to help elect politicians from both parties to Congress. Managers of Paulson & Co., one of the largest hedge funds, dropped nearly $2.5 million in the last two federal election cycles. Executives of Elliot Management, another large fund, spent $23 million over that time. Savvy investors don’t throw around this kind of money if they aren’t getting something back in return.

Whether it’s a contracting process that awards the companies with the best lobbyists instead of the best services, taxpayer funded subsidies to the same multi-billion dollar companies spending millions of dollars to elect politicians to office, or the carried interest loophole, everyday Americans pay a heavy price for a government of, by, and for wealthy special interests.

It’s great to see a growing consensus among some White House hopefuls to end preferential tax treatment for hedge fund managers, but the fact remains that Congress is still beholden to the wealthy donors funding their reelections.

Severing the ties between Wall Street and Congress with, for example, a small donor matching system that incentivizes candidates to raise campaign funds from everyday Americans would not only help us realize the promise of democracy envisioned by the Founders, it would also turn the political tide against the carried interest loophole and other welfare for the wealthy.

If we don’t rebalance our democracy so it responds to the needs of the many instead of the few, the middle class will continue to bear the costs of corruption.

Pearl (@morris_pearl) is the chairman of Patriotic Millionaires (@PatrioticMills) and former managing director of Black Rock, the world’s largest asset management firm.

Tags Donald Trump Hillary Clinton

More Economy & Budget News

See All
See all Hill.TV See all Video

Most Popular

Load more


See all Video