Why this Loophole Won't Die

Obama was against it; Biden was against it; Trump is against it.

No matter, it survives like a stubborn weed.  Year after year.

It’s called “carried interest,” an obscure accounting rule that permits Wall St. managers to pay low capital gains taxes on a performance bonus, where ordinary people would pay taxes at a higher regular income rate in the same situation. The difference is roughly 20% versus about 37%. See 26 U.S. Code Section 1061

Fund managers, in addition to their management fees, can get this tax-favored bonus after three years, provided the company meets the criteria for success. It’s defensible that they should get a bonus, but capital gains taxes apply to owners, not advisors. Key employees pay regular income taxes on their bonuses, even if their contributions are more important than those of the fund managers.

Wall Street argues this loophole helps to align the goals of the fund managers with the performance of the company. However, they already receive a guaranteed fee for that, payable regardless of the marketplace.

It survives for three reasons: first, in a two-trillion-dollar deficit, its tax cost is an estimated $1-12 billion and fixing it would not visibly improve the situation; second, the name and concept are technical in nature, lacking emotional clout in the national debate; third, it is virtually certain Wall St. floods Congress with donations as it comes up for a vote.

It the good old days of overt corruption in the Illinois legislature, there was a tool affectionately called a “fetcher,” a proposed law designed to frighten rich taxpayers to bribe politicians to make the thing go away. An extreme example would be a measure to change the width of the train tracks, which would cost the companies a fortune.

So, all hail the king of the “fetchers,” now elevated to a national level.