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Monday, Nov 12, 2007, 4:39 pm

The Carried Interest Loophole

By Brian Cook
Charlie Cray and Chris Hayes have a great piece on the Nation's website today that examines the recent fraught history between Democrats and the multi-billion carried interest tax loophole. Cray and Hayes (Crayes?) write:

Last summer, the Democrats proposed closing the multibillion-dollar tax loophole for managers of hedge funds and private equity firms. Under the current tax code, they now pay a mere 15 percent capital gains rate on the fees and bonuses (i.e., "carried interest" income) they get paid to manage investment funds they do not own, rather than the 35 percent rate they'd pay under normal income tax schedules. Estimates are this loophole--actually, it's more the size of a levy breach--will sap the Treasury of $26 billion over the next ten years.

But in October, Senate majority leader Harry Reid seemed to backtrack, saying that the Senate schedule was a little too tight to fit in a vote on the measure. Then, on Friday, the House revived hope for the provision when it passed Charlie Rangel's tax reform bill (HR 3996), which would, among other things, close the loophole. But the revival may be short-lived, since the bill now has to make it through the Senate Finance Committee, where one key Democrat, Charles Schumer, has indicated outright opposition and another key member, John Kerry, shied away from endorsing it back in May, suggesting the hedge funds be given a ten-year grace period before the loophole is closed.


(For some pretty disheartening info as to why Reid may have backtracked (having to do with a fundraiser, the Bellagio and Barry frickin' Manilow), check out this Oct. 31 Financial Times piece.)

Crayes manage to get John Kerry on the record in support of closing the loophole, but his statement manages to sneak in a caveat as big as the carried interest loophole. The reason is clear: He's been lobbied hard with lots of campaign cash in support of keeping the ludicrous status quo. As Crayes note, this is perhaps the single biggest issue facing Democrats today: on which side will they fall when it comes to choosing between the interests of their constituents or those of their donors. The way to solve this problem is to simply annihilate it through real campaign finance reform, but in the meantime, it's important to keep pressure (and an eye) on elected officials to make sure they fall on the right side.

Brian Cook was an editor at In These Times from 2003 to 2009. He now works on the editorial staff of Playboy magazine.

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