Paul L. Caron

Monday, November 17, 2014

Idea for the New Congress: End the Carried Interest Tax Break for the Elite

New York Times:  Idea for New Congress: End a Tax Break for the Elite, by James B. Stewart:

Now that Republicans control both houses of Congress, they need to show they can accomplish something, and President Obama has just two years to burnish his legacy. So the search is on for bipartisan consensus.

I have two suggestions: “tax reform” and “carried interest.” ... [S]ix years into the Obama administration, and more than seven since legislation was introduced to end the favorable treatment of carried interest, it seems astonishing that it lives on as a multibillion-dollar tax windfall for an elite group of super wealthy hedge fund, venture capital and private equity managers.

“It’s an outrageous loophole,” Daniel Shaviro, a specialist in tax policy and professor at New York University Law School, said of the tax code’s treatment of carried interest. “No reputable person will say otherwise unless they’re getting paid.” ...

What’s at stake here, besides basic fairness, is billions of dollars in potential tax revenue. The Obama administration estimates that ending the break would generate an additional $15 billion over 10 years. Others put the number much higher. Victor Fleischer, a tax expert, law professor at the University of San Diego and a contributor to DealBook in The New York Times, estimates

the number at $50 billion. ...

Greg Mankiw, the Harvard professor and economist who advised the Republican presidential candidate Mitt Romney, told me flatly this week, “Much carried interest income is really compensation for labor services and should be treated as such.” ...

Professor Fleischer said he believed that tax reform, and specifically, treating carried interest like ordinary income, “still has a real chance in Congress.” Though the beneficiaries of the carried interest loophole tend to be big political donors, “there’s no grass-roots support for the favorable treatment of carried interest,” he said. “The story of income inequality in the United States is driven by the top 1 percent of the 1 percent,” he said, "and these are the people who are benefiting from carried interest. They’re hedge fund managers on Wall Street, not the Bill Gateses and Mark Zuckerbergs of the world, who you want people to emulate. So you can imagine the left wing of the Democratic Party and the right wing of the Republican Party coming together on this, as an issue of Main Street versus Wall Street.”

Professor Shaviro said he was pessimistic about the chances for change, but he, too, thought tax reform and elimination of the carried interest loophole could be popular across party lines. “Given that it’s the super rich who benefit, you can imagine how symbolic this could be in the hands of a skilled orator,” he said.

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