On CapitolHill and the presidential campaign trail, Democrats are pushing a tax hike on some of America’s richest businessmen — managers of private equity firms and hedge funds. Whatever the outcome of the tax debate, by opening up the issue, Democrats have tapped a new source of campaign funds and lobbying jobs for their friends.
In June, Democrats in both chambers of Congress proposed three different bills to hike taxes on managers of hedge funds and private equity firms. The bills gathered co-sponsors over the summer, and Democratic presidential candidates lined up to support the idea of taxing all of managers’ compensation as income, rather than allowing some of it to be taxed at lower capital gains rates.
Sen. Barack Obama, D-Ill., signed on as a co-sponsor of Senate Finance Committee Chairman Max Baucus’ bill. Sen. Hillary Clinton, D-N.Y., endorsed the general idea, declaring: “It offends our values as a nation when an investment manager making $50 million can pay a lower tax rate on her earned income than a teacher making $50,000 pays on her income.” Former North Carolina Sen. John Edwards piled on, too.
But throughout the summer, hedge fund and private equity managers accelerated their political donations. In June alone, they sent $1 million to the Democratic Senatorial Congressional Committee, whose chairman, Sen. Charles Schumer, D-N.Y., was publicly undecided on the tax hike.
In August, after the generous donations from investment moguls, Schumer came out against the tax hike.
What happened here? If you believe The New York Times’ narrative, Schumer sided with his tax-hating Wall Street donor base over his party and his progressive principles, while Obama, Clinton and the bills’ sponsors fought for the little guy, which meant taxing the big guys. The real drama is less black and white, but even more distasteful.
Back in January, Schumer called leading private equity and hedge fund partnersto a dinner in Manhattan, where he told them how the game was played. These partnerships were famously profitable, but unlike other big industries in the U.S., they weren’t playing in Washington. In lobbying and campaign contributions, they seriously lagged behind the energy industry or traditional brokerages.
Schumer’s message that night, as distilled from The New York Times account of it, was: “That’s a pretty nice industry you guys got going. It would be a shame if something happened to it.”
The entire industry gave less than $2 million per year before 2006, while Goldman Sachs, for example, spent $3 million and AT&T $23 million that year alone. On the score of campaign contributions, hedge funds and private equity were similarly frugal. A New York Times analysis in March found that in the 2000 cycle, these firms gave only $5 million to federal candidates. Schumer and his Democrats have fixed that.
The Blackstone Group, a hedge fund giant, spent $3.7 million on lobbying in the first six months of 2007, after having spent less than $250,000 last year. The industry made sure to employ top Democratic lobbyists, including Schumer’s former staff counsel, as well as Republicans.
In additions to increased lobbying efforts, hedge funds and private equity firms also upped their contributions. In the second half of June, just after Montana Democrat Baucus introduced his bill, California fund manager Ted Schlein gave the DSCC $5,000, Kynikos Capital’s James Chanos cut the DSCC two $28,500 checks, David Rubenstein of The Carlyle Group gave Schumer a $6,000 check, hedge fund boss Seth Tobias (since deceased) cut Hillary a $1,000 check, and Seattle private equity millionaire Joe Schocken gave $1,000 to Sen. Dick Durbin.
Shocken highlights a critical angle of this story. Shocken has publicly supported the proposed tax increase. Indeed, Shocken and the other fund managers are not scrambling to make sure tax law staysthe same. These guys are financial wizards, and they could work their way around a simple tax hike.
Whether taxes are higher or lower is not the issue of most concern; it’s the details of tax laws that could drive billions in investment their way or steal it from them that matters. Schumer and the Democrats in Congress have put the tax treatment of hedge funds on the table. The fund managers are paying for their seat at that table.
Examiner Columnist Timothy P.Carney is senior reporter for the Evans-Novak Political Report.
