The Carried Interest Loophole

The Carried Interest Loophole

Let’s talk about the “carried interest loophole,” a provision that allows hedge fund and private equity managers (invariably part of the top 1/10 th of 1%) to classify income from investing gains as “carried interest,” which is taxed at the “capital gains” rate—only about half their normal tax rate. I didn’t study economics at West Point, and financial issues weren’t nearly so complex back in my day (I’m talking about the antebellum years of the 1850s), but common sense tells me that such an arrangement is grossly unfair to the vast majority of Americans, many of whom pay a higher effective tax rate than the highly select group in question.

The rationale is that these people reinvest their money in the economy, creating new technologies, fueling growth, and ultimately creating jobs for working people. That may be at least partially true, and in itself that’s a good thing, but what about all the money that average people spend? After all, it’s not as if working people put their salary in their mattress! No, they spend every penny they earn on things like rent and food and toys for the kids. Don’t all those expenditures help the economy as well? And the fact is, there’s a good deal of evidence that a lot of the money invested in developing new products and technologies is wasted on ill-conceived ventures (“venture capitalism” sounds glamorous, but everything isn’t a success).

It seems to me that every dollar taxed away from working people (and in this instance I’m talking about the bottom 99%!) would have been spent in productive ways. I’m no fan of companies like Walmart, Target or McDonald’s—they don’t pay their workers nearly enough—but is there some reason our tax policy is deliberately steering money away from them—including the whole supply chain and the jobs it creates—and towards Silicon Valley instead? Okay, a good deal of what’s sold at Walmart is actually manufactured in China, but that doesn’t change the essential injustice of what’s going on here.

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