JONATHAN CHAIT MAY 26, 2010
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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.
10 comments
I don't understand why Democrats don't turn this argument on it's head: My opponent want to tax you, the hard worker, twice compared to a fat-cat banker who just got a bail out at your expense. Look who's waging class warfare now. They want the people who actually work for a living, doing the real work that makes this country run, to be taxed heavily while the guy who just types on a computer in a fancy high rise escapes the taxes you pay. They want class warfare? Give it to 'um.
- tnmats
May 26, 2010 at 4:27pm
Seems the capital gains tax cut just increased fast speculation not on businesses but mortgage bonds, derivatives etc. How fast the finance sector tanked afterwards, yet they demand more corporate welfare than before. Brutally put but astonishing! Keep in mind that in the Eisenhower 50s era top tax rates were 90%, under Kennedy were 70% yet economic growth was stronger then than now. I am not suggesting a return to that but Clinton's rate of 39.9% (40 does sound worse) ended up in strong finance sector, low unemployment and Fed. surpluses. It is what J.K. Galbraith said about the premise of supply-side economics:"The poor do not work because they are paid too much, the rich don't work because they are paid too little. Anyone who believes that will believe anything."
- NR027810
May 26, 2010 at 4:57pm
Complaints about the unfairness of taxation date back to Alexander Hamilton's excise levy on distilled spirits. To keep the Internal Revenue Code as fair as possible, Congress should give taxpayers a big KISS (Keep It Simple, Stupid), with ability to pay the overriding principle.
- NR114746
May 26, 2010 at 5:13pm
We ran that experiment, Clinton tax increases in the 90's compared with Bush tax cuts in the OO's. No comparison in terms of results. There may be a valid complaint with double taxing of dividend payouts by public corporations, I think public companies should be able to deduct those payments from their taxable profits, but then they should be fully taxed on the receiving end. The argument that low cap gains leads to jobs maybe applies to investors in IPO's and secondary offerings, where new capital is being deployed into business, but I don't see how low cap gains taxes helps the economy when it is just trading profits in existing corporate shares. Besides, the wealthy get the lion share of benefit from tax deductions like charity and home mortgage and state taxes, because it offsets much more actual tax due to the higher rate they are paying.
- nayyer_ali
May 26, 2010 at 5:46pm
Conservatives in this country long have had a soft spot for the needy super-rich, as I like to say, as well as for the merely rich. The compassion index of the market fetishists of the right shoots upward the further north you go on the income scale. In your superb piece on Ayn Rand, you wrote about how conservatives operate on the principle that what people earn is based entirely, or almost entirely, on merit. Just a minute amount of observation in present-day America should falsify that proposition for the observer; nevertheless, it is an article of faith on the starboard side of the political spectrum that the rich are virtuous and productive and deserve what they receive.
- liberal reformer
May 26, 2010 at 6:36pm
Y'all noticed something strange lately? This JC post is tailor-made for a comment from Mr. R. Ever since JC called him out we've not heard from our fabulous Sir R. Maybe he moved to the conservative nirvana after all.....
- tnmats
May 27, 2010 at 9:20am
Rationale was out here the other day, dissing Jonathan's intelligence. I blasted him and I haven't seen him since. It was probably just coincidence.
- liberal reformer
May 27, 2010 at 10:36am
I've been arguing for regressive taxation for a long time: we need to increase taxes on poor people and give it to the rich, who will spend it so much better. The more money you make, the less you pay. So if you make $20k a year your rate is 90%. If you make more than $200k, you pay nothing. Imagine the growth! Imagine the jobs! Imagine the incentive!
- elirector
May 27, 2010 at 2:12pm
I like your idea, eli. It is supply-side economics on steroids. Under such a regressive tax regime, the poor will be so panicked that they will stop being lazy, they will purchase the collected works of George Gilder and Arthur Laffer, and work 80-hour weeks. Pretty soon, there will be hardly anyone earning under $70k a year.
- liberal reformer
May 27, 2010 at 2:23pm
Again Chait doesn't get it. The question is whether it is a good idea to incent long-term capitalal investments or not. A Yes is in a liberal parasites' best interest, as more investment = more private sector jobs = more economic value you can suckle away
- mr_rationale
May 28, 2010 at 2:27pm