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Clinton and Obama Call to End Tax Breaks for Hedge Funders | The Nation

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Katrina vanden Heuvel

Katrina vanden Heuvel

Politics, current affairs and riffs and reflections on the news.

Clinton and Obama Call to End Tax Breaks for Hedge Funders

Last Thursday, I pointed out that among the leading Presidential candidates only John Edwards had called for ending glaringly unfair tax breaks and loopholes for billionaire hedge funders and private equity managers.

When you look at the revenues desperately needed to fund healthcare, education, housing, infrastructure and support for returning veterans, it seemed high time that Democratic Presidential frontrunners took a stand on what should be the no-brainer issue of tax fairness and sound tax policy.

By Friday, Hillary Clinton and Barack Obama had seen the light. They joined Edwards in calling for cracking down on a tax loophole that allows hedge funders and private equity managers to get away with paying dramatically lower tax rates on their income than those paid by average working Americans. At a rally in Keene, New Hampshire on Friday, Clinton denounced this "glaring inequality." That same day, Obama's campaign issued a statement confirming that the Senator would co-sponsor legislation to raise the 15 percent tax rates on certain private and hedge fund partnerships that go public to the top corporate rate of 35 percent.

At a moment when hedge funds have emerged as among the largest contributors to Democratic campaigns, it's heartening to see the front-running candidates challenge the tax loopholes these institutions are receiving. It's still important, however, to check the fine print of their proposals, and I'll be doing that in an upcoming Editor's Cut. Will they, for example, ensure that all private equity and hedge fund partnerships--not just those going public--be taxed at the higher rate? Will they close the loophole on what is called "carried interest"--which essentially allows fund managers to get away with paying a 15 percent capital gains rate on their outsized performance fees? Will they increase tax revenue by capping offshore tax deferrals used by these investment structures?

We'll see. And while it's good to hear the populist talk on the campaign trail and to track the action in Congress--with various Committees proposing legislation to crack down on these tax breaks--it's crucial that we don't miss the bigger picture of how these titans of greed are gaming our system. That bigger picture was detailed in David Cay Johnston's stunning, must -read article in Friday's New York Times. Lee Sheppard, a leading tax lawyer who critiques deals for the trade journal Tax Notes, tells Johnston: "There is a disconnect between the tax debate in congress and how the tax system actually operates at the highest levels of the economy, These guys have figured out how to turn paying taxes into an annuity. What people don't realize is that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own taxation and so the debate in Washington about what tax rate to pay misses the big picture."

In an easy-to-follow chart, Johnston (the best journalist reporting today on our tax system) shows how Blackstone, one of the leading private equity firms, "has devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public."

Moreover, Blackstone and its partners will get back about $200 million *more* in taxes than they paid initially. According to Johnston, other private equity funds that plan to go public soon include similar push-the envelope tax gimmicks in their preliminary deal documents. (And a report issued last week by the Congressional Joint Committee on Taxation shows that such deals have been done at other companies.) Such "strategies" are so deviously rapacious that even a usually-cautious Democrat like Max Baucus, Chair of the Senate's Finance Committee, was moved to speak out on Friday: "The tax code is a road map for law-abiding citizens and businesses to pay what they fairly owe, not an obstacle course to be gamed and gotten around." Baucus also promised that the arrangement was already under review as part of a general look at issues surrounding private equity and similar investment structures.

But we need tougher steps. Here's a modest proposal. Let's fight for strong legislation, in the short-term, to crack down on the tax loopholes that loot our country's revenue and privilege the richest among us. Let's get legislation to end arrangements like Blackstone's--which game the system and expose these titans of greed for what they are. But let's also pressure the Democratic Congress to create a Special Committee on Taxation with a mandate to hold investigations (with subpoena power) into every aspect of our tax system, with a special focus on gimmicks benefiting private equity and hedge fund firms. The larger goal: to radically overhaul our tax system so it supports, not subverts, fairness, justice and the common good. Without radical reform of our rigged tax system, working people in this country will never get a fair break.

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