By Leo Hindery on NY Daily News
Last week, Gov. Cuomo released a budget for 2018 that calls for massive changes to the state’s tax system. While the sweeping overhaul would affect every New Yorker, one of the most responsible provisions in the bill would adversely affect only a few hundred taxpayers, rightly so and about time.
Cuomo’s budget would finally close the outrageous carried interest loophole which allows private-equity fund managers to avoid paying billions in taxes.
Unsurprisingly, these private equity managers aren’t happy. One prominent fund manager insensitively told Bloomberg that closure of the loophole would be the equivalent of a “pogrom” for fund managers, referring to the organized massacre of Jewish people in Russia and Eastern Europe. He might have wanted to create sympathy for fund managers, but all he did was highlight the outrageous level of entitlement which private equity managers receive.
As a “1-percenter” who has personally benefitted from this loophole, I say that our Albany legislators should get on board.
The carried interest loophole is a purposeful mischaracterization of the bulk of fund managers’ incomes, which by every measure is ordinary income but which for them is taxed at the much lower capital gains rate. These fund managers, some of the wealthiest people in the world, are able to cut their tax bills nearly in half by paying the capital gains rate of 23.8% instead of the top ordinary income tax rate of 37%.
The capital gains tax rate is significantly lower than the income tax rate for a very good reason: Government believes that incentivizing real investment and real risk-taking spurs growth. However, fund managers invest no money of their own and they take on no personal risk. They are simply managing money, no differently than the thousands of other New Yorkers who every day manage businesses from the very small to the very large.
To exalt and justify themselves, these fund managers say that they are investing their time and their expertise. But what manager of anything doesn’t do exactly the same? Yet in the current tax structure, only these few hundred fund managers pay the much, much lower capital gains rate of tax.
To reiterate, it’s not the smallish amount that fund managers earn to cover their expenses to which we are taking exception. Rather, it’s how their bonuses — their so-called “carried interests” — are taxed that is profoundly problematic and unfair.
Restaurant managers receive bonuses for exceptional performance, as do gas station operators and the countless other managers of the state’s thousands of businesses. But only one group of managers — only one — pays the lower capital gains rate of tax.
And as for the hokum that these fund managers are job-creators and thus further deserving of this massive tax kiss — well, they’re not. Businesses preserve and create jobs every day, but the handful of fund managers who steer other people’s money into these businesses do not themselves create jobs. They never have.
Closing the carried interest loophole won’t hurt investors simply because investors don’t earn carried interest. Anyone with money invested in a private-equity fund will still pay the capital gains rate on their investment return. Closing this loophole will only affect the taxation of the fund managers’ bonuses or carried interests.
And in an activity as tightly competitive as private equity, the investors whose money is actually being invested are not going to let these fund managers increase their overall fees just because the mangers are finally having their golden gooses slain.
The carried interest loophole is simply indefensible, ethically and logically. And this is the reason that right now most taxpayers and most in Congress — Democrats and Republicans alike — are of common mind when it comes to finally eliminating the carried interest loophole.
Despite President Trump’s repeated vow to close the carried interest loophole, however, private-equity lobbyists managed to preserve it with only minor changes in the recently enacted GOP tax bill. So while national reform has stalled, Cuomo and the New York state Legislature can send a strong responsible message that the rest of the country, especially the other states considering similar laws, should heed.
So, hats off to Cuomo, and to all the fair-minded Assembly and Senate members toiling alongside him.
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