Former Secretary of State Hillary Clinton is expected to take part in the next presidential debate.
Photograph by Joshua Roberts — Reuters
By Dan Primack
April 16, 2015

During her first public campaign stop in Iowa on Tuesday, Hillary Clinton served up some red meat for the income inequality crowd. Here was the line that jumped out at me:

“There’s something wrong when hedge fund managers pay lower tax rates than nurses or the truckers that I saw on I-80 as I was driving here over the last two days.”

What Clinton was getting at was the issue of “carried interest,” or the percentage of investment profits that hedge fund managers get to keep for themselves (the rest goes to their investors). Even though carried interest is ostensibly a fee for service, it is treated by the IRS as a capital gain rather than as ordinary income. For top earners (which most hedge fund managers are), it’s the difference between paying 20% and 39.6% (or 15% and 35%, for those earning less than $406k).

You know who else was highly critical of this practice on the campaign trail? Barack Obama. In 2008.

But Obama didn’t get it changed, even when he had a Democratic Party-controlled Congress.

The reality is that three major factors continue to work against a carried interest change that so many hedge and private equity fund managers thought was fait accompli years ago:

1. Political football: Democratic politicians love talking on the stump about how the carried interest tax loophole lets wealthy financiers pay lower tax rates than their secretaries. It’s arguably more valuable to them as a rhetorical tool than would be the extra tax revenue. For Republicans, maintaining the current tax treatment lets them say they fought not to raise taxes. Everyone wins (well, except for common sense, tax fairness, most of America, etc.).

2. Geography: Most hedge and private equity fund managers live in blue states. And many of them donate to their elTected officials (thus helping them become elected officials in the first place). This has led to a bit of quiet quid pro quo, in which some legislators who you’d think would be working to change carried interest taxation are happy to busy themselves with other issues.

3. Elephant in the room: Everyone agrees that America needs a massive overhaul of both the personal and corporate tax codes. This is where carried interest taxation could really get changed, since it affects relatively few people and Republicans could (rightly) say they’re closing a loophole rather than raising rates. In fact, Obama proposed this very thing in a tax reform framework several years back, and Rep. Dave Camp (R-MI) did the same last year in his own massive tax reform proposal. Only trouble is that Obama didn’t really push his framework beyond the White House website, and Camp only got courage after deciding to retire. In other words, the thing everyone wants done isn’t getting done.

So let Hillary slam hedge funder tax rates all she wants. It’s just politics, highly unlikely to lead to actual policy.

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