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How to Take on Wall Street and Win

It's up to us to embarrass lawmakers into making financial elites pay their fair share.
 
 
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It’s tax time again, and again America’s richest financiers are breaking out the bubbly. Why? Because they pay less than you do!

The top hedge fund earners -- who personally rake in billions (not millions) of dollars per year -- can toast to the fact that they’re not living under that great radical president, Dwight David Eisenhower, when the top income tax rate was 91 percent, or under that rascal Dick Nixon when it was 70 percent. Nope, today, it’s a 15 percent maximum for the big boys, and we’re letting it happen.

In 2007 Congress took a serious look at closing what’s called the carried interest loophole--along with another loophole that allows hedge funds to defer taxes by shifting profits into offshore structures. But nothing happened due to heavy lobbying by the financial industry.

And for good reason. The top 25 hedge fund managers raked in more than $30 billion just for themselves in 2010 which represents two kinds of income. First, they get 2 percent of all the funds invested with them for “administrative” services involved in managing the funds. Mostly, that pays for their staff, office and trading costs. And then for their exquisite investment prowess, they get 20 percent of the profits. That’s their big bonanza.

The 2 percent is taxed as ordinary income subject to the top Bush-era tax rate of 35 percent. But the 20-percent-of-the-profits are taxed at 15 percent as if that income came from long-term capital gains. But it most certainly is not. Most hedge funds move their money at the speed of light. Long-term is a couple of minutes. So it has been obvious for years that this is just ordinary income for services rendered.

But these are not ordinary people. We’re talking real money. If this loophole were eliminated on the $1.9 trillion hedge fund industry, tax revenues from the richest of the rich would increase by at least $100 billion over the next decade. And the joke is they wouldn’t even notice. How could you if you’re pulling in $2.4 million an HOUR as the leading hedge fund manager did in 2010?

But here’s the thing about being a billionaire hedge fund player. You feel entitled. You’re the new nobility. You’re the smartest, toughest and bravest investor on the globe, performing work that by definition is much more important than what the rest of us do. After all, that’s why you haul in billions. Ergo, you deserve to pay lower taxes.

So you’ll fight like hell to maintain your lower tax rate. You’ll convince yourself as well as anyone who will listen that the economy will crumble if, god forbid, you paid the same tax rate as your secretary.

So when it comes to protecting a loophole that literally puts billions into your private bank account, no justification is too outrageous. Here’s the Chamber of Commerce’s version:


    “Increasing carried interest taxes would reduce the amount of long-term capital available to the US economy and undermine investment, innovation, entrepreneurial activity, productivity, growth and the ability of U.S. companies to compete in the global market.


Why hasn’t Congress acted?

Obviously, with a jobs crisis still with us and public sector budgets in disarray, closing a loophole on the uber-rich should be a snap. And so it seemed when the 2008 elections brought a Democratic president and a Democratic Congress into office during the worst economic crisis since the Great Depression. In fact, only a year ago, Peter Orszag, Obama’s budget chief (who has since jumped ship for big bucks at Citigroup), predicted action on the loophole:


    “I believe that there will be some legislative changes in carried interest, although the exact parameters are still being negotiated…But I think you’re going to see a change in the taxation of carried interest pass the Senate within the next few weeks.” (NYT)


The Democratic-controlled House did pass three proposals to at least partially close the loophole. But it was sent to the Senate’s progressive policy graveyard to die. Why? Did Senate Republicans filibuster the bill to protect their wealthy allies? No, it was the Democrats – and more progressive ones at that – who killed these measures. As Arthur Delaney and Ryan Grim reported last May, (“Democrats Retreat from Class Warfare”)


    “In the Senate, John Kerry (D-Mass.), Maria Cantwell (D-Wash.), Bob Menendez (D-N.J.), Mark Warner (D-Va.), Jeanne Shaheen (D-N.H.), Bob Casey Jr. (D-Pa.) and Patty Murray (D-Wash.) have all expressed a variety of reservations about paying for the jobs measures on the backs of fund managers. On the House side, high-ranking Democrats have spoken out in two separate closed-door caucus meetings this week against taking the vote against the hedge fund crowd.”


Mother of God, why can’t progressive Democrats close a loophole on the richest people in human history?

The answer is us. We let them wriggle off the hook. We let the big guns like Chuck Schumer get away with sounding like progressives while continuing their love affair with the hedge fund crowd and their campaign donations. It’s up to us to embarrass them into making financial elites pay their fair share.

And it’s ever so doable. Hedge funds are vulnerable because no one likes tax evaders. But it all comes down to progressive focus. We need to stick to the job until it’s done. Here’s some of what it requires:

  1. Progressive media need to publicize this issue until we’re all sick of hearing about it…and then some.
  1. The AFL-CIO and its key unions like SEIU and the Steelworkers need to make this a cause célèbre within their own memberships and with the hundreds of politicians they support. Lobbying on this issue, which SEIU did well the last time around, is not enough. They need to mobilize their ranks to press the case.
  1. All of us need to hound our elected representatives from meeting to meeting demanding that they explain why they are letting the richest Wall Street gamblers pay less than their janitors. In particular we need to let the Democrats know that they’ll never succeed as long as they keep kissing up to Wall Street.


But why bother? Aren’t we going to lose anyway?

Maybe. But we need to decide if we can live with ourselves while Wall Street walks all over us

Wall Street made record profits puffing up the housing boom and selling toxic securities all over the globe. When the game crashed we bailed them out and now they’re making record profits and bonuses all over again. Meanwhile state and local governments are in disarray because of high unemployment and the loss of business revenues caused by the Wall Street gamblers that we bailed out. And Wall Street is not paying one extra dime for the damage they have done. It’s as if nothing happened.

And it will stay that way until we shift the battle back to Wall Street. It’s insane that public employees and unions in state after state are bearing the brunt of a crash that Wall Street caused. To be sure, workers and unions need to defend themselves as well as our public infrastructure. But that’s not enough. We need to take the battle back to Wall Street where it belongs. We need to get the financial barons to pay for the damage they created. At the very least we need them to pay regular income taxes like the rest of us.

I realize how hard it is right now for progressives to feel empowered about anything. But as the Middle East has shown us, stranger things have happened.

So as you file your tax returns don’t just get nauseated, -- get mad and get even. Remember that billionaires will never pay their fair share until we force them to. Shutting down this hedge fund loophole is an achievable victory, and maybe, a big step toward salvaging our dignity.

 

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).
 
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