This loophole enables billionaire hedge fund managers to treat their income, for tax purposes, as investment revenue rather than wage income. Instead of paying a 39.6 percent tax rate on millions in income, they pay a lower 20 percent capital gains tax rate. As a result, they dodge an estimated $18 billion in taxes a year.
Obama should take executive action to close this loophole. The fact that inequality has grown over Obama’s eight years is an embarrassment to his legacy. It symbolizes the power of a couple hundred billionaires to capture our political system and block reform.
As Obama did to close “tax inversions” – the off-shore tax loopholes used by global corporations – he should wave his executive branch wand and change the rules. Former Treasury officials are urging him to do this, since Congress is sitting on its hands. The administration says they don’t have the power, according to New York Times columnist Gretchen Morgenson.
The carried interest loophole has been under political attack since 2007, but has been defended by powerful Wall Street interests and their Republican allies in Congress. All three remaining presidential candidates – Bernie Sanders, Hillary Clinton, and Donald Trump – have called for its elimination.
Victor Fleischer, a law professor at the University of San Diego, argues that executive action would make a dent on growing inequality. More than two-thirds of the revenue generated by closing the carried interest loophole would come from financial managers in the richest one-tenth of one-percent. The rest would come from oil and gas partnerships, mining and real estate companies.
Activists in a number of states are not waiting for Congress in Washington, DC. They are proposing that states collect the missing revenue until Congress acts. In New York State, the Patriotic Millionaires and the Hedgeclippers coalition are calling on the legislature to close the loophole, potentially generating $3.7 billion in revenue for the state.
“It is unconscionable that the carried interest loophole allows money mangers in New York pay a lower rate than hard working New Yorkers in every city and town from Plattsburgh to Buffalo,” said Morris Pearl, Chairman of the Patriotic Millionaires, at a planeside press conference. Pearl is the former managing director of BlackRock, one of the world’s largest private investment firms. “It’s time to close the carried interest loophole and New York has tremendous power to lead the nation towards a more fair and just tax system.”
Legislation to “repatriate” the lost fees from the carried interest loophole is advancing quickly in Albany, along with campaigns in New Jersey, Connecticut and Massachusetts.
Whether Obama picks a fight with the hedge fund class will tell us more about his legacy than a mountain of press releases about inequality in America.
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