Editore"s Note
Tilting at Windmills

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November 1, 2007
By: Kevin Drum

BILLIONAIRES ON A RAMPAGE....Apparently the fight to allow hedge fund billionaires to continue benefitting from the revolting carried interest loophole that cuts their personal tax bill in half is ramping up: "It is getting nasty: below the belt stuff; delving into people's personal lives; crossing lines," according to Eoin Callan in the Financial Times, quoting a lobbyist. Henry Farrell asks:

I may be wrong here, but it seems to me that Callan (who is an excellent and careful journalist, as best as I can tell from his previous articles) is suggesting that hedge fund lobbyists are blackmailing politicians and their aides over their personal lives, or doing the next best thing to it. Is there another plausible explanation that I'm missing here?

Hmmm. Sounds about right to me, though I suppose it could just be a reference to generic sleazeballishness. More details, please.

And as long as we're on the subject: the willingness of congressional Democrats to roll over on this issue is simply unbelievable. None of the excuses wash. It's a plain and simple disgrace. If a party of the working class isn't willing to close a ridiculous loophole that provides a certain class of high-roller billionaires with a tax rate that's half of what ordinary people have to pay, what are they here for?

Kevin Drum 12:55 PM Permalink | Trackbacks | Comments (39)

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Hey! More good economic news today!

Wall Street plunged in early trading Thursday as surging oil prices and slower growth in consumer spending erased optimism about the Federal Reserve's positive take on the economy just a day earlier.

Consumer Spending Slows in September- AP
Exxon Mobil 3Q Profit Falls- AP
Chrysler to Cut Up to 12,000 Jobs- AP
Foreclosure Filings Soar in 3rd Quarter- AP

Posted by: Gay Old Potty on November 1, 2007 at 12:58 PM | PERMALINK

Perhaps random crap I heard on the radio, but I swear I heard last week that the top 30 hedge fund managers make more than the top 500 corporate CEOs combined.

Now, if you figure out how much we mostly hate the overpayments that CEOs get, ya got to wonder why our Democratic leaders are working so hard to appease these 30 guys and the folks that work for them.

Posted by: jerry on November 1, 2007 at 1:03 PM | PERMALINK

Right on.

Posted by: Martin on November 1, 2007 at 1:05 PM | PERMALINK

Indeedy. You tell 'em, Kev.

Posted by: shortstop on November 1, 2007 at 1:05 PM | PERMALINK

The really weird thing about this is that a sustained campaign against this kind of business by the Dems would pay-off handsomely at the ballot box. This is where they have shown a complete failure of will. The Rethugs howl about "playing class warfare," and they melt. Damn straight it's class warfare! This is one instance when the now cliche exhortation "bring it on" has some meaning.

Posted by: JeffII on November 1, 2007 at 1:08 PM | PERMALINK

Hedge fund managers are entitled to make whatever the market will bear but the idea that their income should be handled as "carried interest" is ridiculous. The reason for a lower capital gains tax is to reward people for investing their money today in anticipation of (and contributing to) future growth. But fund managers aren't putting their capital at risk so why should they benefit from the lower tax rate? Some claim that managers are investing "sweat equity" but that's ridiculous. Another term for "investing sweat equity" is having a job - I invest sweat equity into my job but my salary is not taxed at the lower rate. There is a good summary of the issue here:

http://www.opencrs.com/rpts/RS22717_20070907.pdf

That the Dems have been unable to make hay out of this issue is shocking. It is hard to think of an easier case for them to make. And it is a case that many conservatives, myself included, would be inclined to support.

Posted by: Hacksaw on November 1, 2007 at 1:09 PM | PERMALINK

I loathe Nader, and can't begin to calculate the suffering he has helped cause, but when it comes to serving the people in power, there is very little difference between the parties.

Posted by: Gore/Edwards 08 on November 1, 2007 at 1:10 PM | PERMALINK

"If a party of the working class isn't willing to close a ridiculous loophole..."

Consider this. The Democratic Party doesn't close this loophole, or take any of a number of actions that would prop up the working class(the bakruptcy bill comes to mind), because they actually believe this is the right way to go.

We need new Democrats.

Posted by: zak822 on November 1, 2007 at 1:12 PM | PERMALINK

The IRS under a Democratic Administration should just go ahead and issue a revenue ruling determining this compensation to be income and not capital gains. They could use the stock option analogy: the value of the stock received when the options are exercised is treated as taxable income if the options were received as compensation, i.e., for work performed.

How is this hedge fund income different? I think the IRS commissioners would generally be less vulnerable to the unspecified personal attacks than would politicians.

Congress doesn't need to take action to correct these egregious treatment of hedge fund income. The IRS just needs to get on it.

Posted by: Cal Gal on November 1, 2007 at 1:14 PM | PERMALINK

And this highlights the problem with the Dems. If someone starts to fuck with us like this, we shouldn't just put our foot down, and try to pass a reasonable tax rate.

We should threaten a special confiscatory tax rate just for hedge funds unless they fall into line.

Posted by: g on November 1, 2007 at 1:15 PM | PERMALINK

This is a pretty disgusting issue. And its true that the top 30 fund managers made more than the top 500 CEO's last year... of course the fund managers have an income that goes up and down from year to year- that's the 20 part of their pay, and a more constant amount - the 2 part.

My view is that we are stuck with the Democratic party that we have and we need to continue supporting it. But given the way the Republican party is committing electoral suicide these days I think there is a light at the end of the tunnel. If the demographics continue to move in the Democrats favor, the Republican party may to cease to function as a significant political force. At that point you'll probably see some kind of split in the Democratic party and eventually two new parties, but with more liberal traditions. That's when its time to take up Nader-like positions on things. But for now, all you can do is lobby like hell, and then hold your nose when it comes to ballot time (at least for the general).

Posted by: mpowell on November 1, 2007 at 1:17 PM | PERMALINK

The Democrats are no longer the party of the working class. Where have you been?

Posted by: hells kitchen on November 1, 2007 at 1:22 PM | PERMALINK

>"...what are they [democratic party] here for?"

Silly question Kevin. They seek the same things as the Republicans, money and power.

In our current [structurally corrupt] system, to get those things, you must pander to the people that can provide them... yup, the rich and powerful! It comes full circle.

[In all fairness, both parties have some people that are exceptions... unfortunately they are all too few and far between]. Above is why I will 'throw my vote away' for Kucinich.

Posted by: buford on November 1, 2007 at 1:23 PM | PERMALINK

Maybe it is time for an 'Amazing Mrs Pritchard' here in the United States...

I am of course referring to the British mini-series running on some PBS stations

Posted by: Peter With on November 1, 2007 at 1:24 PM | PERMALINK

"what are they here for?"

If it wasn't for Democrats, we wouldn't have 25% of Congress against torture.

Posted by: reino on November 1, 2007 at 1:46 PM | PERMALINK

Golly, I wonder why Tim Russert and Brian Williams didn't ask about this at the debate.

And some of you don't think we have a "plutocrat" press corps. Hmpf!

Posted by: Quaker in a Basement on November 1, 2007 at 1:55 PM | PERMALINK

If you're worried about hedge fund managers getting favorable treatment - that's another reason to be wary of Clinton. Chelsea works for a hedge fund.

Posted by: A different Matt on November 1, 2007 at 1:55 PM | PERMALINK

the willingness of congressional Democrats to roll over on this issue is simply unbelievable.

Not really. Despite some hope early in the game, as a group the current crop of Democrats have demonstrated that their only advantage is that they're not Republicans.

Posted by: AJ on November 1, 2007 at 1:59 PM | PERMALINK

Kevin wrote: "If a party of the working class isn't willing to close a ridiculous loophole that provides a certain class of high-roller billionaires with a tax rate that's half of what ordinary people have to pay, what are they here for?"

Notwithstanding some individual Democratic officeholders who are for and of the working class, eg. Ohio Rep. Dennis Kucinich, the Democratic Party has not been a "party of the working class" for a long time.

The Democratic Party is, at best, a "party of kinder and gentler corporate-feudalist dictatorship."

Posted by: SecularAnimist on November 1, 2007 at 2:10 PM | PERMALINK

The Democrats no less than the Republicans reflect a citizenry that is largely detached from politics. As a result, there is little accountability. The Democrats can continue to pay lip service to the party's ideals and go on serving their true constituency (at least for now), the corporate and special interests with the money to bankroll their campaigns.

I work at the grassroots level as the leader of DFA Pasadena. We have 300 members and when it comes time to do the work - 5-8 can be counted on to show up.

Same for the anti war protests my wife and I lead. We have a mailing list of about 200. When we do an occasional local protest - not affiliated with Moveon, we get maybe 10. With Moveon it jumps to 40.

The alternative is to give up. We can't, but that doesn't stop me from seeing the reality as it stands now - an uninformed, disinterested electorate who is getting exactly the kind of government it deserves.

Posted by: Patrick Briggs on November 1, 2007 at 2:11 PM | PERMALINK

I'd be surprised if the Republican rank and file believed this crap any more than the rest of you. It is compensation for work, a fee for a service, thus taxable at ordinary income rates. Sowell would think that as much as Krugman.

This is really about power elites in both parties. Only they support this. Your average Democrat in California or Republican in Texas certainly wouldn't.

Posted by: Sebastian Holsclaw on November 1, 2007 at 3:16 PM | PERMALINK

Come on folks, no props to John Edwards here?

Edwards has centered his campaign around challenging Democrats to become the party of working people again, and valuing work over wealth.

He has a real shot at the presidency, unlike DK, and is the vehicle through which we can successfully challenge big money's stranglehold over the Democratic Party.

Instead of bitching about Democratic ineffectiveness, let's all help Edwards win Iowa!

Posted by: Robin Ozretich on November 1, 2007 at 3:36 PM | PERMALINK

Short answer to your (rhetorical) question: campaign contributions

Posted by: Steve Smith on November 1, 2007 at 3:54 PM | PERMALINK

If a party of the working class isn't willing to close a ridiculous loophole that provides a certain class of high-roller billionaires with a tax rate that's half of what ordinary people have to pay, what are they here for?

The best explanation for voter disenfranchisment by choice that I've ever read.

Posted by: e. nonee moose on November 1, 2007 at 4:26 PM | PERMALINK

the democrat who's rolled over has a name: max baucus.

Posted by: matt on November 1, 2007 at 4:27 PM | PERMALINK

Thank you Senator Schumer, who gets beaucoup contributions from these folks.

The pity is that if hedge funds were taxed at normal income tax rates, we could start retiring the national debt.

Posted by: eCAHnomics on November 1, 2007 at 4:33 PM | PERMALINK

If a party of the working class isn't willing to close a ridiculous loophole that provides a certain class of high-roller billionaires with a tax rate that's half of what ordinary people have to pay, what are they here for?

The other night some aspect of the Democratic Party called and asked me for money. I said no, first they have to grow a spine. She seemed unsurprised by this response.

Posted by: craigie on November 1, 2007 at 4:33 PM | PERMALINK

Maybe Russert can ask them about it now that the Obama halloween costume crisis has been averted.

Posted by: Dawn on November 1, 2007 at 5:12 PM | PERMALINK

The party of the working class is just a sub party of the Democrats. They don't control the Democrats, and the controlling factions are opposed to working class interests.

Posted by: Boronx on November 1, 2007 at 5:23 PM | PERMALINK

I see Mr Drum continues the typical Leftist illiteracy game here.

The reason the little djihad against carried interest has hit a bump is while Hedge Funds (genuinely undeserving) exploit carried interest without good economic rational, venture investors and other investment categories where real economic interest is incented also use carried interest.

But as my last experience taught me, facts are not going to get in the way.

Posted by: The Lounsbury on November 1, 2007 at 6:18 PM | PERMALINK

The Loonie: I see Mr Drum continues the typical Leftist illiteracy game here.

Please, we find such euphemisms offensive. We are pursuing the historical inevitability of destroying the international capitalist system, according to a strict Trotskyite model.

The reason the little djihad

Afraid I'm unfamiliar with that term, old chap. Is it anything like a jihad? I find that bloody wog jargon frightfully confusing.

venture investors and other investment categories where real economic interest is incented also use carried interest.

Good show, old chap! As our friend Ricardo taught us, a little economic mumbo-jumbo goes a long way towards furthering our class interests. Now if only we could snow the bloody Chartists ...

Posted by: alex on November 1, 2007 at 6:33 PM | PERMALINK

But as my last experience taught me, facts are not going to get in the way. Posted by: The Lounsbury

Look dickhead, the return on hedge funds is unearned income, which is a more accurate way of describing capital gains. All unearned income should be taxed at rates higher than earned income. No one but you was talking about venture capital. End of story.

Posted by: JeffII on November 1, 2007 at 6:34 PM | PERMALINK

Thia just shows that except for a few Dems on a few
issues, the party is not on the side of the people.
Oh and the Republicans, no Republicans on no issues,
are ever on the side of the people. Sucks to be us.

Posted by: Alan in WA on November 1, 2007 at 7:12 PM | PERMALINK
venture investors and other investment categories where real economic interest is incented also use carried interest.

Not a bad point for a mentally challenged person. Regardless, if they actually have capital at stake (which, as "investors," we'd assume to be the case), they'll still get preferential tax rates.

Posted by: jpe on November 1, 2007 at 7:19 PM | PERMALINK

Kevin,

see previous post on Bob Somerby.

Posted by: Observer on November 1, 2007 at 7:35 PM | PERMALINK

Speaking of blackmail,

* We know that blackmail happens on in Washington.
* We know that, by nature, blackmail will be grossly underreported.
* We know that members of Congress sometimes vote in seemingly inexplicable ways, against their party, and against their base.

Is there a credible estimate of how much blackmail goes on in DC? It would be easy to underestimate, because blackmail can be applied though hints and implications, rather than blatant threats. A group with a record of destroying careers and lives can apply enormous pressure quite easily, once they've found a weakness.

Based on common knowledge, it would be absurd to think that none of the puzzling behavior in DC is a consequence of blackmail. If some of it is, perhaps we should be asking, Which parts? What might be the tell-tale patterns?

Posted by: Inquirer on November 1, 2007 at 7:53 PM | PERMALINK

You are smart but very naive to think that the Democratic Party would do anything.

After all, this is the spineless party who won't consider impeaching Bush and Cheney for their many crimes.

Posted by: Thomas Paine on November 1, 2007 at 8:58 PM | PERMALINK

The party of Rahm Emmanuel, Steny Hoyer, Tony Coehlo and Dianne Feinstein is "the party of the working class"? Please. The Dems are marginally more concerned with working (or even middle) class interests than the GOP, but you need a magnifying glass to see it.

As long as the election process is a multi billion dollar operation, no mass party can afford to be the party of the working class - the working classs can't afford the price to play.

It would be interesting to see exactly where all those dollars are going to be spent between now and next November. How much if it is in broadcast advertising, 15% of which is kicked right back to the campaign consulants as "sales commission." Perhaps finding a way to run campaigns without managers paid on commission would be a way to get to a system where voices other than the ultra rich get into the conversation.

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Posted by: Victoria on March 21, 2010 at 8:03 PM | PERMALINK
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