It Creates an Easy Way for Wealthy People to Game the System and Closes Virtually No Loopholes

How to Rig an Economy


Chair of the Patriotic Millionaires Morris Pearl on the Daily Show discussing wealth inequality

Remember those hedge fund managers that President Trump railed against endlessly on the campaign trail, the one he said were “getting away with murder” by abusing the loopholes in the tax code? Well, Republican politicians rewrote the entire federal tax code and still couldn’t quite seem to close one of the most grotesque loopholes in the tax code – the carried interest loophole. They’re still getting away with murder.

The carried interest tax loophole is the poster child for the corrupting influence of money in politics. It’s so absurd that politicians on both sides of the aisle agree that it should be closed, but it’s been kept open because of the vast sums of money spent to preserve it. Private equity fund managers have spent millions on lobbying to convince Congress that they deserve special treatment, and it’s worked. The carried interest loophole, once considered a misreading of the tax code that could be overturned if the IRS decided to reconsider it, was made explicit law by the Republican tax bill.

This loophole allows private equity and hedge fund managers to mischaracterize their earnings as capital gains rather than income. By claiming they are in a “partnership” with their investors, they say that their earnings should be classified as capital gains instead of income (because they’re investing their time and expertise into the firm). This is an incredibly dumb argument. The investment of time and expertise in exchange for money is literally the definition of employment.

This lets them cut their tax bill nearly in half by using the much lower capital gains tax rate, just 20 percent, rather than the top income tax rate of 37 percent.

That mischaracterization as capital gains means that this one loophole that most Americans have never heard of allows about 5,000 fund managers around the country to split up $1.8 billion a year. This one loophole nets some of the richest people in the country on average $300,000 each. Imagine how rich you have to be to get a $300,000 TAX REFUND.

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