The billionaire exemption

The billionaire exemption
© Getty Images

The grandstanding billionaires of America are back in the spotlight, this time with an open letter begging the 2020 presidential candidates from both parties to impose a new tax on the super wealthy. But instead of raising taxes and driving the wealthy to seek lower tax jurisdictions, like those fleeing from states like New York and California to states like Texas and Florida, it makes far more sense to first address the most egregious inequality in our tax code and finally close the carried interest loophole.

The Tax Policy Center defines carried interest as “income flowing to the general partner of a private investment fund, often is treated as capital gains for the purposes of taxation.” In simpler terms, the income earned by the general partner of a private investment fund is taxed as capital gains versus ordinary income, which many view as unfair and unjust, thanks to the fact that virtually all professionals are taxed at the ordinary income rate of 37 percent versus the capital gains rate of 20 percent.

During negotiations on the Tax Cuts and Jobs Act, I met several times with leaders in the Senate and the House to make the case to end the carried interest loophole. President TrumpDonald John TrumpHarris bashes Kavanaugh's 'sham' nomination process, calls for his impeachment after sexual misconduct allegation Celebrating 'Hispanic Heritage Month' in the Age of Trump Let's not play Charlie Brown to Iran's Lucy MORE had promised it during his campaign, and in private meetings and at fundraisers, I was told over and over again by leaders in Congress that the carried interest loophole would end. It is an issue of tax fairness. I do not recall members of the billionaires club that signed the open letter joining me in that effort, yet I was convinced at long last that the carried interest loophole would finally be eliminated.

ADVERTISEMENT

But the billionaires struck back by pouring tens of millions of dollars into their lobbyists to avert any kind of change in that law that would eliminate or eviscerate the loophole. This is why suddenly, as so often happens in Washington, the resolve vanished, the votes disappeared, the promise was broken, and the carried interest loophole remains largely intact today. The reforms adopted in the law have failed to fundamentally change the treatment of wealth management income as ordinary income.

Estimates from the Congressional Budget Office, which I believe are uber conservative, project that eliminating the carried interest loophole would generate manybillions in additional tax revenues over the next decade. Make no mistake, these revenues are important. But more important is a tax code that is fair and incentivizes investment. The 20 billionaires who are clamoring for higher taxes mistakenly believe that the rest of their super wealthy friends will be “proud to pay a bit more” of their carried interest fortune forward to America. That is delusional. Where were they over the last few decades? Were they giving millions to their lobbyists?

The reality is that increasing the tax burden on the super rich will impact first and foremost those blue states that already impose confiscatory tax rates, like New York, New Jersey, Connecticut, and California. Those states rely on the wealthy to fund a disproportionate share of budget outlays. In New York City, the top 10 percent of earners pay more than 70 percent of all taxes. In fact, New York City residents already pay a combined state and local rate of 12.7 percent, second only to California with a long time state and local rate of 13.3 percent that kicks in at $1 million in income.

An annual survey conducted by United Van Lines, which keeps tabs on demographic trends between states, found that 62 percent of New York movers, or 450,000 people, left the state in comparison to 39 percent who moved into the state last year. According to that same annual survey, only 8 percent of those who moved earned less than $50,000. The lesson is simple. High taxes drive people away, while low taxes attract them. This is why states like Texas, Florida, and North Carolina are among those that have now gained the most in population and velocity of business activity.

Those who harken back with nostalgia for Eisenhower era tax rates fail to understand how much the global economy has changed. In the 1950s, in the wake of the Second World War, the United States was one of the few safe places in the world to invest and save money. There was no internet providing the ability to conduct business from almost anywhere, let alone the jet service to move freely from country to country. With blockchain, artificial intelligence, autonomous vehicles, the human genome map, and other technological advances, we have come so far so fast. The pace of change has rendered comparing modern tax policy to the Eisenhower days as relevant as comparing the current millennium to the Dark Ages.

ADVERTISEMENT

The world is getting smaller every day and technology has rendered borders to little more than lines on a map for the rich. Higher taxes will create a new class of global citizens who reside in the Caribbean or other jurisdictions with competitive or no taxes. History has many examples of high taxes causing economic flight. To borrow from the great comedian Groucho Marx, “Who are you going to believe? Me or your own eyes?”

There is a better way. Instead of raising taxes, make our current system fairer. Start by eliminating the carried interest loophole, a promise long overdue by our leaders in Washington. They need to close the carried interest loophole now. Let us not grandstand. Let us do simply do it.

Earle Mack served as a former United States ambassador to Finland. He was named chairman emeritus of the New York State Council of the Arts after serving as chairman and chief executive officer from 1996 to 1999.