[Vision2020] Whores And Their Democratic/GOP Pimps

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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February 24, 2013
A Costly and Unjust Perk for Financiers By LYNN FORESTER de ROTHSCHILD

OF the many injustices that permeate America’s byzantine tax code, few are
as outrageous as the tax rate on “carried interest” — the profits made by
private equity and hedge fund managers, as well as venture capitalists and
partners in real estate investment trusts. This huge tax benefit enriches
an already privileged sliver of financiers and violates basic standards of
fairness and common sense.

President Obama recently suggested that he would ask Congress to close this
loophole. Eliminating the carried-interest tax rate should be an easy sell.
It should play to Republicans’ supposed hatred of government handouts and
to Democrats’ commitment to social justice.

But because of the financial lobby’s clout, the loophole most likely won’t
be closed. If it isn’t, shame on both parties for giving us another reason
to distrust our democracy and our capitalist system.

While the tax legislation passed on Jan. 1 increased the top
individual-income tax rate to 39.6 percent from 35 percent for couples
making more than $450,000 and individuals making more than $400,000, it
left carried-interest income taxed at just 20 percent.

Carried interest is taxed at ordinary capital-gains rates, rather than at
the significantly higher ordinary income-tax rates that apply to the
wealthiest Americans. The issue came up last year, because Mitt Romney, the
Republican presidential nominee, had made much of his fortune through
private equity.

This special tax treatment for carried interest protects the general
partners of private equity, venture capital, real estate, hedge funds and
other investment vehicles organized as limited partnerships. (The
investment-holding company I run does not receive carried-interest income.)

Millions of general partners in investment funds receive carried-interest
income when they earn profits for their clients. Since these partners do
not have to risk any of their own capital, carried interest is really a
taxpayer-subsidized fee for managing their clients’ money — often 20
percent of the profits generated in the fund, and sometimes significantly
more than that.

No other affluent Americans enjoy this benefit. A brain surgeon,
stockbroker, corporate lawyer or actor will have to pay the new top
marginal rate percent, while a general partner who manages other people’s
money pays, on carried-interest income, only the 20 percent rate on
long-term capital gains.

This discrepancy dates from 1922, when the top ordinary-income tax rate was
58 percent and capital gains were taxed at 12.5 percent — a big change from
the years 1918 to 1921, when both kinds of income were taxed, in the top
bracket, at 77 percent. But the amount of lost government revenue has
widened significantly since 2000 as a result of the growth of
nontraditional finance.

Although the industry keeps a close lid on the total amounts, experts have
estimated that there are more than 1,400 private equity and venture capital
funds, which collectively manage more than $1 trillion in
limited-partnership equity investments and earn an average of $18 billion a
year on them that is taxed as carried interest. There are also 8,000 or
9,000 hedge funds managing about the same amount of these investments
generating another $18 billion in carried-interest income. And let’s not
forget the 1.2 million real estate partnerships, with more than $1.3
trillion in limited-partnership investments, which yield a further $20
billion each year in such income. The difference in revenue to the United
States government when this combined income is taxed at 20 percent rather
than at 39.6 percent is about $11 billion annually. Indeed, the Real Estate
Roundtable, a leading industry lobbying group, puts the estimate even
higher, at $13 billion — $5 billion in real estate alone.

The first legislative effort to treat carried interest like ordinary income
was a bill submitted by Representative Sander M. Levin, Democrat of
Michigan, in 2007. Annual spending by the private equity, hedge fund and
real estate industry lobbies exploded in that year. Predictably, the
legislation has been shelved or voted down repeatedly ever since. Although
Mr. Obama paid lip service to the removal of the preferential treatment for
carried interest during both of his presidential campaigns, he has yet to
achieve it.

This state of affairs denies our Treasury much-needed revenue; fuels public
cynicism in government; and is evidence of the “crony capitalism” that
favors some economic sectors over others. When plutocrats join with both
parties to protect their own vested interests, the result is a corrosion of
confidence in the free-market system.

The carried-interest loophole may seem small compared with this year’s
projected $900 billion deficit, but ending it would be a major signal that
Washington is ready to put an end to business as usual.

Lynn Forester de Rothschild
<http://www.elrothschild.com/management-team>is the chief executive of
E.
L. Rothschild <http://www.elrothschild.com/>, a family-owned investment
holding company.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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