You want to know a really dirty secret? Here's why Democrats are protecting private equity's "carried interest" loophole

Democrats still hope they can salvage pieces of their ambitious tax agenda even after Sen. Joe Manchin blew up the legislation that included it. I’m sick of trying to fathom Manchin’s mind or motives but senate Democrats think he’s sincere about tax reform. In a Monday interview on a West Virginia radio station, Manchin pointedly said that ensuring people pay “their fair share” of taxes is the main reason he’s come this far in negotiations. “You have a chance to fix the tax code that makes it fair and equitable.”

Well, if Democrats are willing to take another stab at tax reform, I’ve got just the candidate: Get rid of the “carried interest” loophole that lets private equity managers – among the wealthiest people in America – pay a tax rate lower than most Americans. The “carried interest” loophole is huge, and it’s a pure scam. Private equity managers get this tax break even though they invest other peoples’ money. They don’t risk a penny of their own.

Bill Clinton, George W. Bush, and Barack Obama all promised to get rid of it. They didn’t.

Hell, even Donald Trump promised to get rid of it. He didn’t, either. “I don’t know what happened,” said Larry Kudlow, the conservative economist who crafted Trump’s tax plan. “I don’t know how that thing survived,” he said, adding, “I’m sure the lobbying was intense.”

You’d think that the carried interest loophole would be high on the Democrats’ list of revenue-raisers. After all, closing it could raise $180 billion over the next decade from among the richest Americans. That’s $180 billion that could go toward supporting vulnerable Americans and investing in America’s future.

Think again. The loophole – which treats the earnings of private equity and hedge-fund managers as capital gains, taxed at a top rate of just 20 percent, instead of personal income, whose top tax rate is 37 percent – remains as big as ever. Bigger.

Astonishingly, some influential Democrats, such as House Ways and Means Committee chair Richard Neal, defend the loophole. They say closing it would hobble the private equity industry, and, by extension, the US economy.

This is pure rubbish. In fact, private equity firms generate huge social costs. They buy companies they see as ripe for “turnarounds” – a polite way of saying that once they buy these companies they’ll cut wages, outsource jobs, strip assets, and then resell what’s left, often laden with debt.

Look no further than the strike by Alabama’s Warrior Met Coal mineworkers that’s been underway since April 1st. Warrior Met is owned by a group of private equity firms led by New York-based Apollo Global Management. Mineworkers gave up their pension plan, retiree health care and wages to make Warrior Met’s mines mines profitable, as Apollo and other private equity investors siphoned off hundreds of millions of dollars for themselves in special cash dividends.

Since the pandemic began, private equity has been using the flood of cheap money to buy companies at a record pace, and then squeeze them (and their workers) dry. 2021 has been private equity’s biggest ever — reaching a record $1.1 trillion in deals.

So why are Democrats subsidizing private equity’s predatory behavior with this tax loophole? How did the loophole survive the Clinton and Obama administrations when the Democrats controlled both houses of Congress? Why isn’t it even on the current list of tax reforms Democrats went to use to pay for the Build Back Better package, if they can resurrect it in January?

What’s the dirty secret?

Thanks for subscribing to my newsletter. If you’d like to help support it, please consider a paid subscription or a gift subscription.

“This is a loophole that absolutely should be closed,” said Biden adviser Jared Bernstein. But “when you go up to Capitol Hill and you start negotiating on taxes, there are more lobbyists in this town on taxes than there are members of Congress.”

Last year 4,108 individual lobbyists formally registered to lobby Congress and the executive branch on taxes. The private equity industry alone has contributed hundreds of millions of dollars to congressional campaigns – $600 million over the past decade, according to a New York Times analysis earlier this year.

But here’s the thing. Most of these campaign contributions (bribes) have gone to Democrats. Nearly 60 percent of campaign donations from partners in the private equity industry during the 2020 election went to Democratic candidates for federal office. During the 2020 election, Biden’s presidential campaign received over $3 million from people working in private equity and related investment funds, according to the nonpartisan Center for Responsive Politics. Biden was the top recipient of campaign money from this industry.

The dirty secret is Democrats have depended on campaign funding from private-equity partners — hugely wealthy people who are shafting workers across the land. Back in 2010, some courageous House Democrats squeaked through a tax plan that closed the loophole, but Democrats who controlled the Senate wouldn’t go along. Senator Charles Schumer was among those who argued against closing it. The United States, he said, “should not do anything” to “make it easier for capital and ideas to flow to London or anywhere else.” Oh, please. As if Wall Street needed billions in annual bribes to stay put.

When I publicly criticized Schumer for this, he explained to me that he didn’t think it fair to close the loophole for private equity and hedge fund partners but to leave it in place for other partnerships, such as housing developers.

Well, one person’s view of fairness may differ from another’s. But I don’t think there’s any question that the carried interest loophole is unfair to everyone except the fabulously rich who benefit from it.

Democrats must close this loophole. Now.

Your thoughts?

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit robertreich.substack.com/subscribe