Executive Excess on Capitol Hill

By Christopher Hayes and Charlie Cray, The Nation. Posted November 14, 2007.

If there were a futures market for the fate of the so-called "carried interest loophole" (and who knows, these days, maybe there is), its value would be in a state of near constant fluctuation. Herewith, a quick recap of its ups and downs.

Last summer, the Democrats proposed closing the multibillion-dollar tax loophole for managers of hedge funds and private equity firms. Under the current tax code, they now pay a mere 15 percent capital gains rate on the fees and bonuses (i.e., "carried interest" income) they get paid to manage investment funds they do not own, rather than the 35 percent rate they'd pay under normal income tax schedules. Estimates are this loophole--actually, it's more the size of a levy breach--will sap the Treasury of $26 billion over the next ten years.

But in October, Senate majority leader Harry Reid seemed to backtrack, saying that the Senate schedule was a little too tight to fit in a vote on the measure. Then, on Friday, the House revived hope for the provision when it passed Charlie Rangel's tax reform bill (HR 3996), which would, among other things, close the loophole. But the revival may be short-lived, since the bill now has to make it through the Senate Finance Committee, where one key Democrat, Charles Schumer, has indicated outright opposition and another key member, John Kerry, shied away from endorsing it back in May, suggesting the hedge funds be given a ten-year grace period before the loophole is closed.

All this back and forth would be more understandable if the bill itself were controversial, but on the merits and on the politics, it's a no-brainer. On Wednesday the Washington Post did an excellent job of unraveling why such a red-meat issue for Democrats has lost steam in the Senate, focusing especially on Schumer, the Senate Democrats' chief fundraiser, who, the Post reported, switched his position not long after James Simons, a hedge fund manager who earned $1.7 billion last year (you read that right), donated $28,500 to the Democratic Senate Campaign Committee, which Schumer chairs.

And of course the New York senator also represents Wall Street, which these days is chock-full of fiscal conservatives and cultural liberals who are leaning more Democratic than Republican. Hedge funds and investment firms, the Post reports, more than doubled their giving from 2006 to 2007, handing nearly $12 million so far to campaigns, parties and PACs--a stunning 83 percent of which has gone to Democrats. And the majority of staff working for the new industry trade association--the Private Equity Council--are former Democratic Hill staffers. "If you're a Democrat and you have to choose between the alternative minimum tax and the hedge fund industry, that's one tough ideological choice," Viva Hammer, a former Treasury Department staffer, told the Post. "It's a choice between your votes and your wallet."

But what about John Kerry, whom the Post doesn't touch? Kerry supports a proposal to close the loophole that allows hedge fund managers to shelter their pretax income offshore (part of the bill that the House passed Friday) but hasn't endorsed the proposal to close the larger loophole giving the same Wall Street barons preferential tax treatment.

On Friday, The Nation contacted Kerry's office to ask where he stood and received a statement in which, for the first time, Kerry went on the record in support of closing the loophole: "We should be dealing with deferred compensation, tax havens, and capital gains, and, yes, we should be fixing the carried interest issue," he said in a statement. He then proceeded to leave himself considerable wiggle room: "But we should do it in a way that avoids unintended consequences and is thoughtful about the fact that carried interests are common features not just in private equity and hedge funds but in real estate, venture capital, and start-up companies, and fields including healthcare and biotech."

This is progress, but it's pretty easy to see why Kerry would want to preserve an exit strategy (and not just in the interest of maintaining the narrative suspense in the tale of our poor benighted tax fix). According to one lobbyist (who doesn't work for the firms), two prominent Boston-based firms that are members of the Private Equity Council--Bain Capital Private Equity and Thomas H. Lee Partners--have been lobbying Kerry hard on the issue. Moreover, FEC data indicate that not long after closing the loophole was first proposed back in April, a number of Bain private equity partners started to make big contributions to Kerry. Partners Josh Bekenstein, Diane Exter and Jonathan Lavine have all given in excess of $4,000 each to the Kerry Senate campaign fund. Bain's mananging director, Mark Nunnelly, and two staffers have also all maxed out to Kerry this cycle with $4,600 each to his Senate campaign.

Some of these Bain partners have also given tens of thousands of dollars to key Democratic party campaign committees in recent years. But even that is chump change compared with what is at stake. According to Executive Excess, a report by the Institute for Policy Studies and United for a Fair Economy, while US corporate CEOs made an average of $10.8 million last year, the top twenty private equity/hedge fund managers pocketed an average $657.5 million, or 22,255 times the pay of an average US worker.

So Kerry (like many of his colleagues) is in an all-too-familiar position, caught between the interests of his voters and his donors. Given what the partners at Bain and elsewhere have to lose, smart money in DC is on the loophole surviving this legislative session intact. But as Kerry's recent statement shows, the first step to ending the suspense over its fate is simply to ask Democratic elected officials just which side they're on.

See more stories tagged with: workplace, tax code

Christopher Hayes is a contributing editor of In These Times and the Chicago editor of Just Cause magazine.

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