JONATHAN CHAIT MAY 26, 2010
One iron law of American politics is that any tax break for wealthy individuals, however unjustifiable or even accidental it may be, will enjoy total support on the right. To wit, today Peter Wallison of the American Enterprise Institute defends the carried interest loophole:
Who are these disfavored partners? You guessed it—managers of private equity funds, real estate development partnerships, venture capital firms, and hedge funds. For these particular partners the Special Rule provides a penalty that the partners of any other kind of partnership don’t suffer.
Now, what are these folks doing that deserves a special penalty that no one else has to pay? They are investing in businesses of all kinds, which means taking risks on new ideas, new business models, new managers, and new employees—in short, creating jobs. No wonder this Congress thinks they deserve a penalty.
I detect two arguments here. The first is that Congress wants to impose a "special penalty" on investment managers. In reality, it's merely eliminating a totally unjustifiable tax break. People who set up equity deals have arranged to take their pay in the form of capital gains, thus qualifying for a tax rate at half the ordinary rate. But their pay is not a return on capital -- they haven't invested any capital. It's a pure tax loophole. The people who are paying a penalty are those who don't work in a field where capital is sloshing around and they can qualify for a special half-rate tax bracket.
The second argument is that the people who enjoy this loophole are "investing in businesses." It's true. This is the conservative argument of last resort. When all else fails -- when you can't plead double-taxation, or unfairness, or some technical argument against the tax -- you just throw out the general idea that rich people are good because they create jobs. The logic here, of course, could be used to justify any tax break enjoyed by the rich. Want to eliminate all taxes on people earning more than $1 million? Why not create a negative tax rate for them? The Peter Wallisons of the world would be there to defend it, because they're job creators.