David Ignatius - Why is Congress protecting a tax code that benefits the rich?

It's a strange populism that denounces Wall Street in one breath and, in the next, shouts down tax changes that would treat the financiers' incomes like those of everyday folks.

But that pro-billionaire version of populism seems to have won big in the midterm elections. And it probably means the demise of a congressional effort to strike down one of the most outrageous provisions of our messed-up tax code, which is the special treatment of "carried-interest" compensation that's paid to many investment fund managers.

This loophole is so unfair that it gets criticized even by some of the tycoons who have benefited from it, such as former Treasury secretary Robert Rubin and other prominent investors I've queried. Basically, it taxes the money paid to managers of private-equity funds and similar partnerships at 15 percent, as if it were risk capital, rather than at ordinary income rates of 35 percent. (I'm assuming that the neopopulist Congress will balk at letting that rate rise to its old, pre-Bush level of 38 percent.)

As is so often the case with policies that benefit big business, the carried-interest break survives by invoking small business. It's argued that if congressional reformers have their way, they will gut compensation for all the little mom-and-pop partnerships that depend on carried interest. (Not to mention the hard-pressed little guys who own oil partnerships.)

A similar illogic leads many people to believe you are attacking Main Street if you suggest withdrawing the Bush-era tax cuts to people making more than $250,000. Perhaps it's part of the American ethos that we all think we're rich. Otherwise, it's hard to explain this popular defense of privilege - and the fact that the politically enfeebled Obama administration has caved to extending the tax cuts.

Democrats tried to stand up to pressure from the billionaires' lobby on the carried-interest loophole. Barack Obama campaigned against the provision in 2008, and he included the repeal in his first two budgets. The House passed a version of the reform on May 28, denying capital-gains rates for what the House report rightly said was "investment management services income."

The Joint Committee on Taxation said treating most carried interest as ordinary income would raise $17.7 billion over 10 years, not small change for a country that needs to get serious about balancing the budget.

The action shifted to the Senate, and the special-interest fog began to roll in, so that the yachts were able to steam under cover of the tugboats. The Private Equity Growth Capital Council, the industry's lobbying group, managed to sound like the Salvation Army in warning with precise imprecision that 36,600 to 127,800 jobs could be lost by removing the carried-interest loophole. There would be potential investment loss of $7.7 billion, and the nation's fragile real estate sector would suffer, the council warned. A cynical reading of the message was, "Save the loophole or we'll shoot the hostages."

Critics yelped loudest about a provision to tax the "enterprise value" of investment partnerships that are sold (which would close another potential loophole). The Wall Street Journal likened the "double-whammy" tax-reform package to a "small-time hood" who shoots his victim twice, out of "pure vindictiveness."

The happy-talk version of "billionaire populism" can be found in the mission statement of American Crossroads, an independent political-action group linked to Karl Rove. It trumpets an America where "the human creativity and initiative that are unleashed by liberty and free enterprise generate the economic growth this nation needs" - vs. those universal nemeses, taxes and wasteful government spending.

Among the little guys contributing to American Crossroads are developer Donald Trump and several other billionaires. The donors to its companion Crossroads GPS are hidden, but according to NBC News, "a substantial portion of Crossroads GPS's money came from a small circle of extremely wealthy Wall Street hedge fund and private equity moguls" who are "bitterly opposed" to the administration's plan "to increase the tax rates on compensation that hedge funds pay their partners."

The tycoons can relax. Two White House economic officials told me this week that fixing the carried-interest loophole is probably dead, for this Congress and the next. It was hard enough to beat the big guys. But once they successfully hid under the cover of the little guys, it was impossible.

That political legerdemain is making America more unequal every year, and the polls show people are mad as hell at Wall Street and Washington, both. And yet the popular chorus continues: Save the tax breaks for the rich.

davidignatius@washpost.com

via washingtonpost.com

Posted via email from Brian's posterous