That’s Where the Money Is
Posted on June 9, 2010
Heavily borrowing from a principle first employed by Willie Sutton, an infamous bank robber, Senate Democrats are pushing through an obscure tax provision that will accomplish pretty much the same goal: Stealing money from productive members of society because that is where the money is.The provision is called carried interest, and it is targeted at people who do their business primarily through business partnerships.
Though I file taxes every year, I am not in any way an expert on tax law. It makes my head spin. The tax code is so intricate, so detailed, so built for those who can afford to hire tax attorneys, that for most normal people, it is well beyond comprehension.
That is why I turn to smart guys like Doug Holtz-Eakin, the former Congressional Budget Office Director, who can help me make sense of what politicians are trying to do to take more money away from taxpayers. And Doug has put together an illuminating paper on the unintended consequences (or perhaps intended consequences, I can never tell with these Democrats), of the new carried interest tax proposal being currently debating as part of a tax extenders bill that is on the floor of the Senate (http://americanactionforum.org/files/TaxTreatmentCarriedInterest.pdf). The impact on the economy is most likely going to be negative. Most who are in partnerships now will likely hire lawyers who will find ways to do business without being subject to this new tax.
The money that investment and real estate firms should be putting back into investments in new ideas or products or by buying new real estate or building new buildings, instead will be spent on lawyers who will try to find ways to avoid paying the new tax. Instead of hiring workers to build things, this new tax will inspire the hiring of lawyers to determine the impact of the law.
As Doug and his colleagues at the American Action Forum put it: “Taxing carried interest is not a matter of fairness or closing loopholes. Increasing taxes on carried interest would constitute a potentially large tax increase on partnerships – especially in finance, insurance, and real estate – both in dollar terms and relative to the income generation of the affected partners. The specter of these tax implications will spawn reactions ranging from legal restructuring to crowding out valuable real economic transactions that are not sufficiently profitable to carry the additional burden. Perhaps most damaging, the higher taxes on carried interest will re-allocate managerial talent, as the entrepreneurially-inclined are deterred by these higher taxes and seek their outlets elsewhere in the economy. The proposed tax treatment is inconsistent with basic principles of tax policy.”
The reason the Democrats are doing this is not based on high-minded ideals or solid tax policy. It is because they want more money (and this provision would raise a substantial chunk of change) to pay for bigger government.
It was interesting last night in the primary elections. Nobody who won campaigned on raising more taxes in such a way as to inhibit economic growth, all for the ostensible reason to grow government bigger. In fact, the one candidate who hewed closest to that message, Bill Halter, who ran a campaign from the left to topple Democrat Blanche Lincoln, got beat in a Democratic primary.
Harry Reid, who faces a tough reelection campaign against a conservative anti-tax candidate, has promised to push through the job extenders bill, which includes this job killing provision. I think this one provision is a further example of why Reid and many of his colleagues may very well lose this coming November. The American people don’t want job-killing tax increases, no matter how cleverly the Democrats may try to hide them in intricate, complex and opaque language.