Jonathan Chait

The Return Of Shameless Bob Johnson

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In what may be the perfect mix of issue, argument and spokesman, Bob Johnson has spoken out in favor of maintaining the carried interest tax loophole. To understand how rich and cosmically perfect this is, there are a couple things you need to understand.

First, what is the carried interest tax loophole? It's a way for private equity managers to legally cheat on their taxes. The deal is that the manager takes most of his compensation in the form of a chunk of the profit on the investment deal he sets up. This allows the manager to collect his income as capital gains, which means he pays no tax until he cashes in, and the tax he does pay is at the lower capital gains rate, which tops out at 20%, or half the rate on normal income. The capital gains tax break -- which shouldn't exist either, but that's another story -- is designed to reward income derived from capital. Equity managers are not making money off of their capital -- of which they're putting up none -- they're making it off of their labor.

Howard Gleckman of the Tax Policy Center explains:

imagine a large financial services firm: At one desk sits a 26-year-old Harvard MBA who is beavering away as an investment banker. Across the hall, his classmate is doing private equity deals. Their work is indistinguishable. Yet the income generated by the banker is taxed at 35 percent while income produced by private equity deals is taxed at 15 percent. It is hard to work up much sympathy for investment bankers these days, but this seems to be a textbook case of what has gone wrong with the tax code.

The carried interest tax loophole is a pure example of a subsidy that lacks any remotely persuasive public policy justification, and exists solely because its beneficiaries are by definition extraordinarily rich and well placed to obtain political influence.

On to question number two: Who is Bob Johnson? He's an African-American billionaire who specializes in making preposterous racialized arguments on behalf of policies that benefit the very rich. In 2001, when he was the Bush administration's black voice for repealing the estate tax, I profiled him:

Johnson did what he often does when his interests are at stake: He played the race card. Johnson gathered a collection of black business leaders and demanded an end to the estate tax. Taking out newspaper ads of their own, Johnson's group attacked the tax for draining wealth from the black community. Unlike "very wealthy white Americans" who supported the tax, he declared, "We as African Americans have come to our wealth on a different path, a different road than they have." Gates and his friends, Johnson implied, were not really promoting the common good; they were trying to keep the black man down. All of a sudden, it was not so clear who held the moral high ground. Estate tax repeal had become a civil rights issue.

Almost no one--not even the White House--had thought to frame the issue this way. And for good reason: It is a bizarre inversion of the truth. "Elimination of the Estate Tax," Johnson's ad argued, using extraneous capitalizations for emphasis, "will help close the wealth gap in this nation between African American families and White families." But the estate tax is paid only by people who inherit large fortunes, and black people, as one might suspect, are far less likely than white people to do so. (Blacks make up about 12 percent of the population, but less than one-half of 1 percent of estate tax payers.) And the revenues from the tax, obviously, fund government programs, which tend to help those with low incomes, who are disproportionately black. Repealing the estate tax, therefore, would dramatically widen the wealth gap.

But Johnson gave Bush the cover he needed to once again cast himself as a champion of minority interests. "As Robert Johnson of Black Entertainment Television argues, the death tax and double taxation weighs heavily on minorities," said Bush, who added that his plan would allow people to transfer wealth "from one generation to the next, regardless of a person's race."

I'm fond of the profile and would humbly recommend that you read the whole thing. It's hard to sum up his unique marriage of plutocracy and racial mau-mauing without going through his entire breathtaking career. In any case, if ever there was an issue made for Johnson, it's the carried interest loophole. There's unlimited amounts of Wall Street money sloshing around Washington looking to pay people to defend the indefensible -- ideally in terms that will sound persuasive to liberals. That's Johnson's cue to step forward and defend his class in the name of his race:

Robert L. Johnson, founder and chairman of The RLJ Companies today expressed his concerns about proposed legislation that, if enacted, will more than double the taxes and pose a direct threat to the economic viability of minority private equity firms.

“In my opinion, this legislation would cause a rapid decline in minority private equity firms and possibly eliminate minority participation in this important financial sector of the American economy.

Minority firms have difficult challenges in attracting fund investors and an even more difficult time attracting top managerial talent. If this legislation is approved, it will become even more daunting for minority firms. Historically, minority firms generate less investment capital than major firms, require more time to raise funds compared to larger firms, and, as a consequence, if taxes are raised on minority companies the same as it exists for large firms, talented minority men and women would likely choose to stay at their existing firms.

Furthermore, if minority firms can’t hire the best and the brightest, corporate and union pension funds that are already skeptical of the effectiveness of minority private equity funds would likely decrease their investment in these funds due to the lack of “experienced and talented fund managers. For the most part, minority firms invest their funds in minority businesses and other businesses located in urban communities.

Sorry, no link -- this was emailed to me by the Glover Park Group. (Hope you enjoy your Wall Street lucre while your eternal soul burns in Hades, Glover Park Group.) In this case, Johnson's argument is so absurd I don't even know what to say about it. Eliminating a tax break enjoyed by all private equity firms will somehow exert a disproportionate influence on those owned by minorities. Indeed, it will cause managers to leave minority firms and go to white firms, despite the fact that white firms will also have to pay regular income taxes on their income from private equity deals. And of course leave aside the loopy idea that, even if Johnson was somehow correct about a disproportionate income on non-white multimillionaire hedge fund managers vis a vis white multimillionaire hedge fund managers, why would the the multiple billions of dollars needed to sustain this tax break be a remotely fair or efficient program to help minorities?

I'm sure there are about fourteen other reasons why Johnson's argument that the carried interest loophole represents a vital bulwark of minority rights is ridiculous, but anybody who understands the issue well enough to enumerate them probably has too much self-respect to bother engaging with such tripe.

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