Paul L. Caron

Thursday, September 16, 2021

Choi: Democrats Should Finally Close The Carried Interest Loophole For The Wealthy

Washington Post op-ed:  Democrats Should Finally Close the Carried Interest Loophole for the Wealthy, by Jonathan H. Choi (Minnesota; Google Scholar):

House Democrats on Sunday began circulating a preliminary proposal for tax reforms that could bring in as much as $2.9 trillion by raising taxes on the nation’s wealthiest individuals and corporations. The measures, intended to help pay for Democrats’ proposed $3.5 trillion budget package, include increasing the corporate tax rate and adding a tax on individuals making more than $5 million.

Lamentably, the proposal wouldn’t get rid of the carried interest loophole, which allows fund managers to receive a share of investment profits at the lower tax rate reserved for long-term capital gains. While the Democrats’ proposal includes minor tweaks to the holding period for carried interest, it mostly leaves the benefit intact.

As Democrats firm up the tax plan in the coming days, they should seriously look at a proposal introduced on Aug. 5 by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Sen. Sheldon Whitehouse (D-R.I.) to get rid of the carried interest preference altogether.

Why continue to maintain a tax provision that allows immensely rich fund managers to pay lower tax rates than ordinary workers? That’s what happens when the managers’ share of profits is treated as a long-term capital gain.

With wealthy Americans employing lobbyists who are working overtime to dissuade Congress from increasing their taxes, Wyden and Whitehouse have no doubt received plenty of pushback on this entirely sensible idea.

If the senators are looking for allies, they can find plenty among the nation’s tax law professors. I recently conducted a survey of these professors, my colleagues in that realm, and found that 86.7 percent supported ending preferential taxation of carried interest. Only 6.1 percent disagreed, a ratio of 14.2 to 1. This was by far the issue on which tax law professors agreed the most. ...

The Congressional Budget Office says that closing the loophole would bring in $14 billion over 10 years. But others think that’s a seriously lowball estimate. Victor Fleischer, a tax law professor at the University of California at Irvine, calculates that the reform would bring in as much as $180 billion over the same period. ...

The government spending now being proposed certainly differs from what has happened before. Tax revenue will be precious. If Wyden and Whitehouse can persuade their colleagues, and if those colleagues can resist the private equity lobby, and if this issue isn’t traded for other items during the budget process — then maybe, finally, the lowest-hanging fruit in tax law will be picked.

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