Economic policy I leave to those better-versed in it. Yves Smith, for one.
A week ago, she addressed “the multi-layered kabuki battle brewing over the indefensible and mislabeled “carried interest” loophole.” Joe Biden is threatening to close it, finally. Cory Doctorow explained it this way:
To understand carried interest, you have to start with capital gains tax. In the US, wages – money you get for working – are taxed at a higher rate than capital gains (money you get because you sold something you own at a profit).
Hedge funds and private-equity firms are crying foul over losing the tax break, Smith snarks. “Biden got far more support from private equity firms and hedge funds. Yet here he is, biting the hands that fed him!” Why, closing the loophole might do more harm than good, say private-equity lobbyists quoted in the Wall Street Journal.
Smith writes:
Understand what these lobbyists are asserting, because it’s a howler. They are trying to say, with a straight face, that investment in private equity might shrink because the pay levels for the top dogs might fall from egregious to merely embarrassingly lucrative. Or to paraphrase supermodel Linda Evangelista, “I never get out of bed for less than half a million a day.”
Pray tell, what could these Masters of the Universe possibly do that that would generate anything within hailing distance of what they earn now? Even if lower after-tax pay were a real threat, they’ve got nowhere to go, even before getting to perks like getting to push around investment bankers and top lawyers and fly private class. The fact that men that are unseemly wealthy like Steve Schwarzman and Henry Kravis are still working well into their 70s says it’s not for the money. They really like the job.
Naked Capitalism readers no doubt recognize the second strained claim, that private equity is good for the economy. The lobbyists have the temerity to talk about health care as if private equity’s involvement has been a plus, when it’s been the moving force behind surprise bills, rising ambulance prices, and finding and creating choke points in must-have services, like dialysis, by becoming mini-monopolists in target markets.
What attracted my attention was Cory Doctorow’s more Biden-ish summary of the issue (emphasis mine):
The idea that people who make money from toil should be punished because they didn’t make money by owning things is obviously fucked up – not least because if you tax workers’ wages it leaves them with less money to buy capital on which to realize gains.
And if you let the ownership class retain more of their income, it lets them buy more stuff on which they can realize those tax-preferenced gains. Preferential tax rates for capital gains are a way to make workers poorer and owners richer, period.
Now hear the word of the Lord!
The practice dates from the 16th century. That’s 500 year or so ago, for those keeping score.
If you run a hedge fund or a private equity firm, you’re typically compensated in a “2-and-20” scheme: every year, you pocket 2% of the money you’ve been given to manage, and 20% of any profits that money has realized.
These are wages, not capital gains. The money in the fund isn’t your money, it’s someone else’s (money managers investment in their own funds is a token sum, 1-3% of the total), and your share doesn’t come from selling something you own, it comes from doing a job.
PE and hedge fund managers make millions – sometimes hundreds of millions – every year this way, and because of the carried interest loophole, they get to treat those wages as if they were capital gains.
That’s how it is that if you work your guts our bending steel at a sheet-metal plant, your wages are taxed at a higher rate than the wages of the distant finance-ghoul who bought that plant, debt-loaded it, and drove it into bankruptcy.
So carried interest is bullshit and yeah, we should kill it. But as Smith points out, that would be a largely symbolic victory: there are many new tax-gimmicks that money-managers could use to shift those wages around and maintain the pretense that they are capital gains.
The only reason that these ripoff plutes are even fighting about the loophole is that they find it aesthetically untenable that the US government should poke holes in the risible fiction that their wages are, in fact, capital gains.
Naturally, the lords of the manor will simply find (or buy legislation to create) new ways of sheltering their wages from the taxman as capital gains.
Thus, writes Smith:
Getting rid of the preferential treatment of capital gains is the biggest step Biden could take to reduce the income and wealth gap between the rich and the rest of us. That plus imposing a financial transactions tax would have the salutary effect of cutting the economically unproductive asset management business down to size. Sadly we are a long way away from seeing these changes implemented.
Ruling class gonna rule. Until the pitchforks arrive, as Nick Hanauer warns.