A Tax Scam Even Trump Can See Through

There is virtually no one who will defend the loophole on any rational terms.
04/11/2017 05:25 pm ET Updated Apr 11, 2017

Imagine a tax scam so outrageous that even Donald Trump admits it’s inexcusable. Hard to believe, I realize, but it’s all on tape right here – along with more information about how organizers are sidestepping the cash-drunk powers that be in Washington and working to put billions of dollars back into state budgets.

The scam is called the carried interest loophole and its beneficiaries are private equity partners and hedge fund moguls – aka virtually everyone in the Trump Administration. Now that he’s in office, Trump isn’t touching it, which surprises exactly no one.

The carried interest loophole allows partners at private-equity firms and hedge funds to treat a big portion of their income as capital gains – that is, as profit on the sale of an investment. Capital gains are taxed at 20 percent, plus a 3.8 percent surtax typically. Compare that to the tax rate for ordinary income – salaries earned by the rest of us – which is 39.6 percent, and you see the problem.

The rational justification for carried interest is nonexistent. The term itself comes from the 12th century when ship captains where paid by percentages of the sale of the cargo they carried. The idea, which was eventually enshrined in the tax code, was to encourage certain kinds of investments by rewarding those who took risks to build businesses. How that got twisted to reward private equity and hedge fund partners who make the vast majority of their millions in fees is lost to history.

There is one billionaire who claims that the carried interest loophole is good for America because it gives him the money to support philanthropy. Beyond that single example of hubris so mind-blowing you would be forgiven for thinking it is satire, there is virtually no one who will defend carried interest on any rational terms. There is an effort every year in Congress by Sen. Tammy Baldwin and Rep. Sander Levin to get rid of it and even some halfhearted support from one or two Republicans but nothing gets done.

Meanwhile, $15.6 billion that could be going to schools, to clean energy investments, to repairing our nation’s crumbling infrastructure, instead sits in the vaults of multimillionaires.

Fed up with congressional inaction, states are now getting serious and creative about the issue. They can’t change federal tax law, but they can mitigate the damage it does by “repatriating” lost revenue. Some are well into the process, pushed along by Hedgeclippers and other groups standing up for the rest of us.

Several eastern states and Illinois are already well along that path with legislation that taxes the carried interest income of hedge fund and private equity partnerships headquartered in their states.

New York’s proposal would get around this congressional inaction by raising state income taxes on private equity and hedge-fund partners who live in New York. The increase would be equal to the tax savings they receive from using the loophole at the federal level. The aim is for the tax increase to take effect once various states have closed the loophole. That way, the tax could not be avoided by moving to a neighboring state.

Closing the loophole would raise $3.7 billion a year in New York. Estimated annual revenue would be $938 million in Massachusetts, $535 million in Connecticut and $112 million in New Jersey.

Labor, community and activist groups are building coalitions to spread the movement to other states including California, DC, Pennsylvania, Virginia, Ohio and Minnesota. Check out how much money each state stands to gain here. Then check out the Hedgeclippers and see how you can help.

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