By Robert Reich
 |
| Rhode Island's top Wall Street Democrat |
In Washington’s coming budget battles, sacred cows like the tax
deductions for home mortgage interest and charitable donations are likely to be
on the table along with potential cuts to Social Security and Medicare.
But
no one on Capitol Hill believes Wall Street’s beloved carried-interest tax
loophole will be touched.
Don’t
blame the newly elected Republican Congress.
Democrats
didn’t repeal the loophole when they ran both houses of Congress from January
2009 to January 2011. And the reason they didn’t has a direct bearing on the
future of the party.
First,
let me explain why this loophole is the most flagrant of all giveaways to the
super-rich.
Carried
interest allows hedge-fund and private-equity managers, as well as many venture
capitalists and partners in real estate investment trusts, to treat their take
of the profits as capital gains — taxed at maximum rate of 23.8 percent instead
of the 39.6 percent maximum applied to ordinary income.
It’s
a pure scam. They get the tax break even though they invest other peoples’
money rather than risk their own.
It’s
worth about $11 billion a year —
more than enough to extend unemployment benefits to every one of America’s
nearly 3 million long-term unemployed.
The
hedge-fund, private-equity, and other fund managers who receive this $11
billion are some of the richest people in America. Forbes lists 46 billionaires who
have derived most of their wealth from managing hedge funds. Mitt Romney used
the carried-interest loophole to help limit his effective tax rate in 2011 to
13.9 percent.
So
why didn’t Democrats close it when they ran Congress?
Actually,
in 2010 House Democrats finally squeaked through a tax plan that did close the
carried-interest loophole, but the Democratically-controlled Senate wouldn’t go
along.
Senator
Charles Schumer (D-N.Y.), one of those who argued against closing it, said the
U.S. “shouldn’t do anything” to “make it easier for capital and ideas to flow
to London or anywhere else.”
As if Wall Street needed an $11 billion annual
bribe to stay put.
To
find the real reason Democrats didn’t close the loophole, follow the money.
Wall Street is one of the Democratic Party’s biggest contributors.
The
Street donated $49.1 million to Democrats in 2010, according to the
non-partisan Center for Responsive Politics. Hedge-fund managers alone
accounted for $5.88 million
of the total. Schumer and a few other influential Democrats were among the
industry’s major beneficiaries.
Wall
Street has continued to be generous to Democrats (as well as to Republicans).
The
Democrats’ unwillingness to close the carried-interest loophole when they could
also goes some way to explaining why, almost six years after Wall Street’s near
meltdown, the Obama administration has done so little to rein in the Street.
Wall
Street’s biggest banks are far bigger now than they were then, yet they still
have no a credible plan for winding down their operations if they get into
trouble.
The
Dodd-Frank Act, designed to prevent another Wall Street failure, has been
watered down so much it’s slush. There’s been no move to resurrect the
Glass-Steagall Act separating investment banking from commercial banking.
Not
a not a single Wall Street executive has been prosecuted for his involvement in
the frauds that caused the mess.
Wall
Street was the fourth-largest contributor
to Barack Obama’s presidential campaign in 2008, and is already gearing up for
Hillary Clinton’s 2016 run.
Hedge-fund
and private-equity managers are donating generously to Priorities USA Action, a
super PAC dedicated to getting her elected.
The
hedge fund Renaissance Technologies has contributed $4 million to
date. D.E. Shaw, another fund, has donated over $1 million. Khosla Ventures and
Soros Fund Management have donated $1 million each.
Many
Wall Street financiers have donated $25,000 (intended to be the maximum
contribution) to the Ready for Hillary super PAC.
Robert
Wolf, the former president of UBS’ investment bank who now has his own advisory
boutique, told “Politico” that six
in ten Wall Street types are Democrats, and that “when and if she decides to
run, [Hillary Clinton is] going to have an incredible support foundation from
Wall Street.”
Just
because a candidate takes Wall Street money doesn’t mean he or she is beholden
to the Street.
But
the reason Democrats have pulled their punches with the financial sector for
years is because it’s hard to punch the hand that feeds you.
This
must stop. America can’t tackle widening inequality without confronting the
power and privilege lying behind it.
If
the Democratic Party doesn’t lead the charge, who will?
ROBERT B. REICH, Chancellor’s Professor of
Public Policy at the University of California at Berkeley and Senior Fellow at
the Blum Center for Developing Economies, was Secretary of Labor in the Clinton
administration. Time Magazine named him one of the ten most effective cabinet
secretaries of the twentieth century. He has written thirteen books, including
the best sellers “Aftershock" and “The Work of Nations." His latest, "Beyond
Outrage," is now out in paperback. He is also a founding editor of the
American Prospect magazine and chairman of Common Cause. His new film,
"Inequality for All," is now available on Netflix, iTunes, DVD, and
On Demand.
