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 people’s money rather than risk their own.
The loophole has no economic justification. As one private-equity manager told me recently, “I can’t defend it. No one can.”
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.