Public Equity

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One of the real joys of being a politician must be the righteousness you get to summon when you do THE RIGHT THING despite its political cost. The sheer pleasure of lecturing reporters on why you voted to ban, say, Caribbean junkets must go a long way toward offsetting all the wedgies you'll receive the next time you're in the House locker room. I imagine this pleasure to be so seductive that some politicians, like some heroin addicts, go to near-suicidal lengths to attain it. (Walter Mondale's proposal to raise taxes in 1984 comes to mind here.)

A somewhat milder form of this addiction was on display last month, when, in rapid succession, John Edwards, Barack Obama, and Hillary Clinton all vowed to close a loophole that lets certain Wall Street money managers pay a mere 15 percent tax on most of their income, versus the 35 percent that most people with similar incomes face. Substantively, I consider this to be an extremely worthy position. (To see why, read this and this.) And, on the face of it at least, the position appeared to entail some cost for the candidates, given that all three have raised huge amounts of money from employees of private-equity funds and hedge funds, many of whom benefit from this loophole.

Judging from the campaigns' recent statements, however, you'd think they'd just pledged to force the children of hedge-fund billionaires into combat service. A Clinton spokesperson toldThe Hill newspaper that her supporters "know she is going to stand up for what she feels is right, and that's one of the things they find so appealing about her." "People who choose to donate to Senator Edwards do so because his policies are right for America," an Edwards official chimed in. "In order to achieve our goals for the country, everyone has to sacrifice a little." The Obama campaign told the paper that the senator "can agree to disagree with supporters up and down the gamut--some may be wealthy and some may not be wealthy."

Was the gesture truly this heroic? I'm not so sure.

According to a recent report in The Wall Street Journal, employees of the eleven firms represented by the Private Equity Council, an industry lobbying group, gave Democrats 51 percent of their $2.7 million in political contributions in 2000. Democrats spent the next several years opposing George W. Bush's income tax cuts for the affluent, along with his efforts to cut the capital gains tax and the tax on dividend income. All of these measures dramatically lowered taxes for the private-equity-fund set. And, when all was said and done, giving by Private Equity Council members had shifted dramatically--toward Democrats. The firms gave 69 percent of their $3.4 million in political contributions to Democrats in 2006. Suffice it to say, there's little evidence from the last six years that rich fund managers take offense when Democrats try to raise their taxes.

That said, let's be honest. When you're running a brutally competitive presidential campaign that's going to require upward of $100 million to finance, you worry about any defection from the ranks of your mega-rich supporters. Even if you believe that taking a certain position probably won't hurt your fundraising much, you'd rather not take any chances. Wall Street money men may not look kindly on having their industry targeted directly. And just because the titans of private equity have become hostile to the Bush-era GOP doesn't mean they won't give the party's standard bearer a hearing in 2008.

When you look closer, it's hard not to notice such calculations at work. The discussion about closing this loophole had been raging in Congress for a good three months before any of the leading Democrats took a position. Notably, none of the candidates weighed in before June 30, the end of the year's critical second fundraising quarter. If Clinton and Edwards and Obama really didn't care about offending their wealthiest donors, it's not clear what took them so long. On the merits, the issue is as close to a no-brainer as it gets in politics, at least for anyone with an even mildly progressive worldview. (Even former Bush economic advisor Greg Mankiw, no bleeding heart he, has argued that private equity fund managers should be taxed at the same rate as the rest of us.)

It's also hard to ignore how, around the time the Democratic front-runners were mulling over their positions, a certain set of realities was taking shape on Capitol Hill. A New York Times piece this Monday noted how Chuck Schumer--the Senate's third-ranking Democrat, and the only Democratic member of both the Banking and Finance committees--has essentially committed himself to killing the loophole-closing effort. The Times reported that Schumer spent much of June raising money from private-equity and hedge-fund types while assuring them that the loophole would remain in place. On Tuesday, the Journal reported that Private Equity Council apparatchiks had even begun swaying Democrats who don't normally benefit from the industry's largesse--like Sen. Maria Cantwell of Washington and Rep. Xavier Becerra of California. (The Journal said many Democrats had been persuaded that they would hurt the returns of public pension funds, who increasingly entrust their money to private equity poohbahs. Here's a counter-proposal: Instead of spending tens of billions of dollars subsidizing Wall Street's mega-rich to slightly boost the pensions of teachers and policemen, why don't we spend, say, a fraction of that amount increasing their salaries? I even know where we could get the money...)

From the perspective of Wall Street, Schumer and other pliant congressional Democrats are good cops to the presidential field's bad cops. But the bottom line is that everyone involved--the fund managers, Hill Democrats, the leading presidential campaigns--knows the loophole-closing effort is highly unlikely to succeed. That makes it pretty costless for Wall Street to keep bankrolling Democrats--and, in turn, pretty costless for the leading presidential candidates to oppose their loophole.

Look, Clinton, Obama, and Edwards have taken a position that is substantively right. That's certainly much better than the opposite position, and it requires significantly more courage than staying mum, as lower-tier candidate Chris Dodd has done. For that matter, one can imagine a future Democratic president signing a law that closes the private-equity loophole, however meager the possibility looks today. The point is that there are times when you get to enjoy a little righteousness, and times when you get to enjoy a little righteousness and we in the media get to enjoy calling you on it. And this turns out to be one of the latter.

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