Tax Justice Digest stories about Private Equity
Pete Peterson, a co-founder of the Blackstone Group, is retiring from the private equity business and unveiling a new foundation bearing his name. The Peterson Foundation, which will be well-funded and staffed by luminaries like GAO director David Walker and former senator Sam Nunn, will work to promote the idea that entitlement programs cause our nation's fiscal problems, and will address other issues like nuclear proliferation.
As the New York Times reports
, there is one problem with Peterson's scolding Americans for enjoying Social Security and Medicare: Peterson himself sees no problem in enjoying government largesse that is provided through the tax code. He has benefited enormously from the tax loophole for "carried interest," which allows buyout fund managers to enjoy the low 15 percent capital gains rate for compensation they receive for managing other people's money. As CTJ has argued in many places, this loophole essentially subsidizes the incomes of millionaires and billionaires through the tax code.But this type of contradiction is nothing new for Peterson. Back in 1994, CTJ director Robert McIntyre wrote an article in the American Prospect called "False Messiah." He pointed out that the ideas Peterson promoted back then basically came down to (A) slashing entitlement programs that help people to reach and stay in the middle-class and (B) replacing the progressive income tax with a consumption tax that would be a massive boon to the wealthy while increasing the tax burden on everyone else. A consumption tax would make income from wealth and savings entirely tax-free. That's the sort of income rich families have a lot of and poor families have none of.
Nonetheless, Peterson had a remarkable ability even then to present his ideas as advice that would save the middle-class. It will be worth watching his new foundation to see whose interests it really serves.
Alternative Minimum Tax: Congress Passes "Patch" But Doesn't Pay for It
The AMT was originally intended to target only the very wealthy. Over time its reach expanded because the exemptions were never indexed to inflation, and the Bush tax cuts caused the AMT to expand much more. Since the AMT is in fact an alternative tax, if regular income taxes are cut without corresponding cuts in the AMT, more people pay the AMT.
This is unfair partly because the goals were extremely ambitious in retrospect. Democrats promised to provide $50 billion worth of AMT relief and also promised not to increase the deficit. This was while the Republicans in Congress and the President took an extreme stance on tax matters. Closing any tax loophole, even the most blatantly unfair tax loophole, represents a tax increase that will wreck the economy according to the President and his allies in Congress. They even equate stopping offshore tax evasion with tax increases that will discourage investment. In hindsight, it's clear that lawmakers taking this extremist position on taxes were ready to follow their President off a fiscal cliff by obstructing common sense measures.
It's also unfair to say the Democrats "caved" on PAYGO, as some media accounts have it, given that every Democrat in the Senate voted to pay for the AMT relief as did all-Democratic majorities in the House. Thanks to the 60-vote threshold to pass legislation in the Senate, the minority party was able to block the fiscally responsible legislation. Why the press has largely failed to note that Republican obstruction is the root cause of the AMT-PAYGO debacle is entirely unclear.
On Wednesday, December 12, the U.S. House of Representatives passed a bill, H.R. 4351, that would extend the exemptions that keep the Alternative Minimum Tax (AMT) from affecting most Americans and would replace the revenue the AMT is projected to otherwise collect. One provision would help replace the AMT revenue by restricting offshore tax avoidance schemes by wealthy individuals. Another provision would delay the implementation of an unnecessary tax break for multinational businesses which hasn't even gone into effect yet.
Dropped from this bill is a provision that would end the tax subsidy for "carried interest," a type of compensation paid to wealthy fund managers. Carried interest is currently taxed at a special, low 15 percent rate, lower than the tax rate paid by many middle-class families. Last week, Republicans in the Senate blocked a similar House-passed bill that would have ended this tax subsidy because they were committed to defending this break for millionaire fund managers. So, in the spirit of compromise, the House passed H.R. 4351 on Wednesday without the carried interest provision.
Incredibly, Republican leaders in the Senate are insisting that they will block this new bill even though it lacks the "controversial" carried interest provision. They seem to believe that H.R. 4351 includes "tax increases" that will hurt the economy. By this logic, the economy literally depends on the ability of rich individuals to avoid taxes by using offshore shell companies. Also by this logic, the economy depends on a tax break for multinational companies that has not even gone into effect yet.
Meanwhile, 17 Democratic members of the House, mostly members of the Progressive Caucus, signed a letter sent to House Speak Nancy Pelosi demanding that the cost of AMT relief be fully offset. The letter argues, quoting Citizens for Tax Justice, that "AMT relief, by itself, would not be particularly progressive ... Most of the benefits would go to the richest fifth of taxpayers, and if it's deficit financed, the cost could be borne in the future by middle-income Americans in the form of cuts in public services or higher taxes. But AMT relief can be progressive if the costs are offset with revenue-raising provisions that target the very wealthiest Americans, those who have benefited the most from the Bush tax cuts." The leadership of the 48-member Blue Dog Coalition of Democrats in the House also has stated repeatedly that any AMT relief that is not paid for will be unacceptable.
For more information about the House bill and how it offsets the cost of AMT relief, see the new short paper from Citizens for Tax Justice describing the legislation.
New Paper from CTJ Criticizes Turn to Borrowing
This sets the stage for a standoff with the House, where Democratic leaders are adamant that no laws be enacted to increase the federal deficit, in keeping with the pay-as-you-go (PAYGO) rules that were reinstated when the Democrats took control of Congress earlier this year. But in the Senate, because 60 votes are needed to pass most legislation, the Republicans were able to block the fiscally responsible approach even though it was supported by every member of the majority party.
"I'm willing to accept a tax cut for people making upwards of $100,000 a year, if we send the bill to people making millions," said CTJ director Robert S. McIntyre. "But I can't support cutting taxes for such well-off people and sending the bill to people who make $50,000. Yet sadly, it's exactly those ordinary taxpayers who will likely bear the cost of the increased debt -- through higher taxes or reduced public services in the future."
Republicans Manage to Preserve Loophole for "Carried Interest" -- for Now
In the AMT relief bill passed by the House last month, one of the revenue-raising provisions to offset the cost would have closed the loophole for "carried interest," a type of compensation paid to buyout fund managers. Republican leaders have demanded that this loophole allowing wealthy fund managers to pay taxes at a lower rate than middle-income families be preserved. They appear to have gotten their way for now, as House Ways and Means Committee Chairman Charles Rangel has said he would drop the carried interest provision and replace it with some potentially more palatable revenue-raising provision.
But the battle over carried interest is far from over. In September, CTJ sent to the House and Senate a letter signed by around 300 organizations from every state urging that the loophole be closed. Lobbyists for the industry have acknowledged that the issue is likely to come up again in the next couple of years as Congress considers broader tax reform.
President Bush Relied on Expanding Reach of AMT to Mask Cost of His Tax Cuts
Republican congressional leaders claim that Congress should eliminate the AMT without paying for it because no one ever intended to collect the AMT's revenues. But that's not true.
When George W. Bush proposed his tax cut plan, he and his tax advisors were well aware that, since the AMT is an alternative tax, lowering the regular tax rates without adjusting the AMT would push tens of millions of people into the AMT. But they needed the added AMT revenues to significantly reduce the projected cost of Bush's tax cut program. In fact, Bush's chief economic advisor was adamant that Bush's plan contemplated a huge increase in the AMT.
"Having created most of the AMT problem, Bush and his congressional allies are now trying to rewrite history so they can get away with loading even more debt on our children," said McIntyre. "They shouldn't be allowed to get away with it."
On Friday, the U.S. House of Representatives voted 216-193 to pass H.R. 3996, a bill to extend relief from the Alternative Minimum Tax and other tax breaks for one year and offset the costs by reducing tax loopholes for private equity fund managers and others. All but eight Democrats present voted for the bill, while all the Republicans present voted against it.
The AMT provision is known as a "patch" because it prevents the AMT from reaching millions of more taxpayers (as the AMT is scheduled to do under current law) for a year but does not permanently address this problem. A larger bill (H.R. 3970) was introduced by Ways and Means Chairman Charles Rangel (D-NY) on October 25 to repeal the AMT entirely and offset the costs, mostly with a surtax that would reduce the Bush tax cuts for those families with incomes above half a million dollars a year. This bill is a major tax reform that would make the tax code simpler and more progressive without making the fiscal situation worse than it already is.
But because Republicans seem sure to block any provision that would reduce tax breaks even for the richest Americans, Rangel introduced the smaller bill (H.R. 3996) to patch the AMT for just one year, giving Congress more time to consider his more comprehensive tax reform. H.R 3996 borrows many of the good ideas from the larger bill, like closing the loophole for "carried interest" and a loophole that allows private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes. H.R. 3996 would also extend some business tax breaks (such as the research credit) for one year. Smaller provisions in the bill would make the Child Tax Credit more accessible for poor families and would create an additional standard deduction for property taxes for those who do not itemize their tax deductions.
Surprising Amount of Focus on "Carried Interest"
The Republicans chose the counter-intuitive strategy of rallying around one of the most offensive and blatantly unfair loopholes in the tax code, the loophole for "carried interest," which is a form of compensation paid to certain types of fund managers. This loophole essentially allows these fund managers to earn hundreds of millions of dollars and yet pay taxes at a lower rate than their middle-income receptionists.
Citizens for Tax Justice sent members of Congress a new fact sheet explaining that the loophole is a subsidy paid to millionaires, through the tax code, and funded by the rest of us who are paying income taxes at ordinary rates. The loophole is enjoyed by those who manage other people's money but are allowed to pretend that they're investing their own money -- which entitles them to the low, 15 percent rate for capital gains. Contrary to the confusion sowed by fund managers, the capital gains rate for those who actually invest would not be altered.
Citizens for Tax Justice also issued a statement responding to the claim that the real estate industry would be damaged if the carried interest loophole is closed. The vast majority of people who are affected by what goes on in the real estate industry -- realtors, construction workers and home-buyers -- pay income taxes at ordinary rates like everyone else, meaning that they are paying for this loophole rather than benefiting from it.
Most important, however, was the willingness of hundreds of state and local organizations from around the country to tell Congress that this loophole is simply unfair to ordinary taxpayers in their states. Thanks to all the organizations that joined the sign-on letter urging Congress to close the loophole.
Battle Ahead in the Senate
Several in the Senate have suggested that it will be difficult to secure the 60 votes needed to avoid a filibuster in their chamber and approve this bill. Many Republican Senators, including the ranking Republican on the Finance Committee, Charles Grassley (R-IA) have made clear that they would rather increase the federal budget deficit than pay for AMT relief. We would suggest that any anti-tax conservative in the Senate who wants to take responsibility for filibustering AMT relief for millions of taxpayers should go ahead and do so to make his or her position clear to the public.
Help for Low-Income Included
Also included is a change in the Child Tax Credit rules to make it easier for poor families to benefit from the credit, as well as a small additional standard deduction for middle-income homeowners. These two provisions combined cost about $4 billion over ten years.
Rangel Stands Firm -- Tax Cuts Will Be Paid For By Closing Carried Interest Loophole, Among Others
The smaller bill borrows some very good ideas from the larger plan in order to pay for the one-year AMT relief and the extenders. One of these provisions would eliminate the "carried interest" loophole for private equity fund managers, which would raise about $26 billion over ten years. Another provision would limit the ability of private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes, and would raise about $24 billion over ten years.
Another provision would delay the implementation of a tax break that was passed in 2004 but is not yet in effect. The 2004 tax break essentially expands a loophole allowing multinational corporations to take U.S. tax deductions for interest payments that are really foreign expenses. The provision delays this tax break several years and raises $25 billion over ten years.
Republicans Say Their Own Tax Laws Will Lead to the Biggest Tax Increase in History
Republicans members of the committee were hostile to the offsets and argued during the markup of the bill that the AMT should be repealed and the revenue should not be replaced because it was never intended to be collected. This ignores the fact that the Bush Administration intentionally decided not to permanently fix the AMT when it enacted tax cuts in order to mask the true cost of those tax cuts. It also ignores the fact that the Bush Administration, like Congress during both Republican and Democratic control, has budget plans that assume the expanded AMT revenue (based on current law under which the AMT will expand its reach) will be collected.
Congressman Earl Blumenauer (D-OR) pointed out the irony of the minority party's argument. Republicans at the hearing seemed to say that the expiration of the Bush tax cuts -- which was written into the laws enacted by President Bush and the Republican Congress, along with the scheduled expansion of the AMT that was intentionally left in place when Republicans controlled Congress and the White House -- would lead to the "biggest tax increase in history." Even if we believed that allowing the tax laws to exist as they're currently written could constitute a tax increase, it would be hard to understand why the complaints are coming from the party that held power and passed a major tax bill every year for six years.
Meanwhile, even the conservative Washington Times has editorialized that "it seems disingenuous" for the GOP to call Rangel's plan a tax hike.
On Tuesday, the Washington Post created a great deal of confusion by reporting that Senate Majority Leader Harry Reid (D-NV) has told lawmakers and lobbyists that the Senate will not have time this year to consider legislation eliminating the "carried interest" loophole, which allows billionaire fund managers to pay a lower tax rate than their middle-income receptionists. This was seen in some quarters as an indication that the issue is dead for this year, provoking several editorials blasting the Senate Democrats for choosing campaign contributions from lobbyists over tax fairness. The reality is that whether the Senate addresses the carried interest issue is largely up to the Senate Finance Committee, not Senator Reid.
Carried Interest Issue Wound Up in Debate Over Alternative Minimum Tax
Whether or not the Senate is unduly influenced by lobbyists is certainly a question worthy of debate, but some clarification is in order. It's true that the Senate is not likely to consider a stand-alone bill that does nothing but close the carried interest loophole. But every member of Congress already knows that. No one in Congress is talking about a stand-alone bill. The question everyone is considering is whether or not a provision to close the loophole should be used to offset the cost of other legislation Congress wants to pass. For example, Congress needs to pass a bill to keep the Alternative Minimum Tax (AMT) from affecting more taxpayers.
The number of people affected by the AMT will increase from around four million last year to 23 million this year if Congress does not act, and just fixing the AMT for this year alone would cost over $50 billion since Congress and the administration have always assumed that this revenue would be collected. A provision closing the carried interest loophole would raise some revenue (although an official estimate has not yet been made) and could therefore be used to offset part of the cost of dealing with the AMT. Over in the House, Ways and Means Chairman Charles Rangel (D-NY) has long said that he will likely try to close the loophole to help offset the cost of fixing the AMT.
Ball Is in the Finance Committee's Court
What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.
Carried Interest Issue Won't Die Regardless of What Happens This Year
Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."
For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.
