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The challenge of closing tax loopholes for billionaires

Robert Reich, professor of public policy | May 24, 2010

Who could be opposed to closing a tax loophole that allows hedge-fund and private equity managers to treat their earnings as capital gains – and pay a rate of only 15 percent rather than the 35 percent applied to ordinary income?

Answer: Some of the nation’s most prominent and wealthiest private asset managers, such as Paul Allen and Henry Kravis, who, along with hordes of lobbyists, are determined to keep the loophole wide open.

The House has already tried three times to close it only to have the Senate cave in because of campaign donations from these and other financiers who benefit from it.

But the measure will be brought up again in the next few weeks, and this time the result could be different. Few senators want to be overtly seen as favoring Wall Street. And tax revenues are needed to help pay for extensions of popular tax cuts, such as the college tax credit that reduces college costs for tens of thousands of poor and middle class families. Closing this particular loophole would net some $20 billion.

It’s not as if these investment fund managers are worth a $20 billion subsidy. Nonetheless they argue that if they have to pay at the normal rate they’ll be discouraged from investing in innovative companies and startups. But if such investments are worthwhile they shouldn’t need to be subsidized. Besides, in the years leading up to the crash of 2008, hedge-fund and private equity fund managers weren’t exactly models of public service. Many speculated in ways that destabilized the whole financial system.

Nor are these fund managers especially deserving, as compared to poor and middle-class families that need a tax break to send their kids to college. Nor are they particularly needy. Last year, the 25 most successful hedge-fund managers earned a billion dollars each. One of them earned 4 billion dollars. (Paul Allen’s personal yacht holds two luxury submarines and a helicopter. Henry Kravis is one of the wealthiest people in the world.)

Several of these private investment fund managers, by the way, have taken a lead in the national drive to cut the federal budget deficit. The senior chairman and co-founder of the Blackstone Group, one of the largest private equity funds, is Peter G. Peterson, who never tires of telling the nation it faces economic ruin if deficits aren’t brought under control. Curiously, I have not heard Peterson advocate closing this tax loophole as one way to further the cause of fiscal responsibility.

Closing tax loopholes for billionaires may seem like a no-brainer, especially at a time when the nation is cutting back spending on the middle class — slashing budgets that fund child care, public schools, and public universities. Tens of thousands of teachers are getting pink slips.

But you can expect a huge fight.

There is also a moral issue here. Call me old fashioned but I just think it’s wrong that a single hedge fund manager earns a billion dollars, when a billion dollars would pay the salaries of about 20,000 teachers.

This post was also  published in Robert Reich’s Blog.

Comments to “The challenge of closing tax loopholes for billionaires

  1. What do you make of the objection to the carried interest tax that says it is written so broadly that it will catch up real estate partnerships and family partnerships in the process and have negative effects on small-businesses? the Chamber and Private Equity Council are running big ads about the new tax on small businesses.

    Is there a flaw in the law that needs to be corrected?


  2. Laws were written by and for the rich. There is no such thing as closing the loopholes as they were put in place initially for a reason.

    • Karl, the American rich are about as bad as they can get. In a recent NYT Op-Ed, Paul Krugman reminded us of FDR famous 1936 speech when he was struggling with “the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.”

      Nothing has changed, as documented this morning in the L.A. Times “Firm shaken by suicides” about a Chinese computer components manufacturing corporation that has 300,000 workers slaving in their Shenzhen Longhua Science and Technology Park for Apple, Dell, HP etc.

      Thus Robert is most correct to document “There is also a moral issue here. Call me old fashioned but I just think it’s wrong that a single hedge fund manager earns a billion dollars, when a billion dollars would pay the salaries of about 20,000 teachers” but fails to admit that Cal faculty have contributed to this state of immorality in America today.

  3. As you just wrote most eloquently Robert: “Call me old fashioned but I just think it’s wrong that a single hedge fund manager earns a billion dollars, when a billion dollars would pay the salaries of about 20,000 teachers” is a great reality check on what is going hideously wrong with California education.

    Along this same line, by coincidence the L.A. Times had an editorial today “Toward a leaner, smarter UC – Plans to streamline administrative functions will save the institution $500 million a year.” Holy Cow Robert, that HALF A BILLION DOLLARS wasted by UC every year! By your calculation that would pay salaries for about 10,000 teachers!

    QUESTION: Why haven’t the UC Powers That Be been preventing this hellacioius amount of waste all along instead of perpetuating 10 independent Ivory Tower feifdoms?

    One must also ask, why does California education have to be in the crash and burn mode to make UC Poobahs actually introduce efficient operating practices at last that their business administration department has should have been teaching all along?

    Makes one wonder again if anyone in the UC aristocracy really cared about California, and more importantly, whether they even cared about the future of Humanity until educational calamity occurred?

    And, relative to caring about Humanity, another perspective produced by current events is the fact that UC has the largest academic-industrial research “alliance” in U.S. history that turned UC into BP’s own profit-making subsidiary for a mere $50 million a year for ten years. An alliance with the same BP that is destroying the Gulf ecosystem and has now achieved the dubious distinction you yourself foresaw as a “huge noose around Berkeley’s neck” now that UC has sold out their academic integrity and independence, and maybe even California education.

  4. It would be foolish to increase the economic disincentives for innovation at a time like this. We urgently need new sources of affordable electricity. The Fusion Power Corporation believes the first fusion power plant could be built for under a $100B. If Blacksone, Kravis, Allen and Gates pooled their resource to finance this effort to create massive amounts of electrical energy,and jobs, without the generation of greenhouse gases, nuclear waste and proliferation risk; I say they deserve the tax break and our thanks.

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