It’s obvious what’s going on here, even if plenty of folks don’t want to admit it.
First, everyone knows that the hedge-fund managers and private-equity firms are skirting the income tax by structuring their income to be technically “capital gains.”
The managers get to keep (carry) a portion (an interest) in the funds they manage. In reality, the investors are paying the managers for their labor of managing, which is income. The carried interest doesn’t represent capital the managers put at risk. It represents compensation. It should be taxed as income, but it gets taxed as capital gains, thus at a lower rate. (The tax code’s favoritism of investment income over labor income also deserves questioning.)
When an obvious tax trick rewards very rich people and their high-worth customers, Congress should act to close the loophole. But Congress hasn’t. Democrats had a provision in their tax-and-spend bill this year to close this loophole, but centrist Sen. Kyrsten Sinema (D-AZ) demanded it come out. So Democrats pulled it (instead imposing a janky tax on stock buybacks), which brings us to the second obvious story that nobody will admit.
Senate Majority Leader Chuck Schumer (D-NY) was never going to close the carried-interest loophole. Schumer lives off of that loophole. He is married to the hedge-fund and private-equity industries in a very dysfunctional marriage. Schumer extracts wealth from the industries while constantly, for two decades, threatening to take away their loophole, but always saving them in the end.
The threat makes sure they pony up. The save makes sure the threat is always viable.
Schumer is the top beneficiary of hedge fund donations, by a large margin, according to data from the Center for Responsive Politics. Hedge funds heavily favor Democrats, as well, having given President Joe Biden $1.5 million last cycle, more than 10 times what the industry gave to Donald Trump.
The numbers for the private equity industry tell the same story — Schumer has raised more than any other candidate from them (by a factor of 2), and the industry favoring Democrats over Republicans.
If you consider the history of the carried-interest loophole, including the recent history, from the perspective of Schumer’s interests, it all makes perfect sense.
Again, Schumer wants hedge funds and private equity firms to be very interested in politics. He wants them to lobby more, and he wants them to donate more. So, what does he need to do in order to bring that about?
He needs to hang over their head continuously the possibility that their loophole is in danger. So, he’s spoken about that for nearly 20 years.
Yet, to keep that threat viable, he needs never actually to follow through on it, which is why Democrats never repealed the loophole when they could have (through budget reconciliation) in 2009 through 2015, or last year. Schumer wants the loophole to survive.
Including repeal in the bill allowed Schumer to signal to the party’s Left that he tried (“But Sinema, man, what can you do?”), and it gave him a free bargaining chip with Sinema (“OK, fine, we’ll drop loophole repeal if you get on board, Kyrsten”).
Then, pulling the repeal allowed him to win over Sinema and keep the threat alive to make sure the industry funds his party’s efforts to keep the Senate.
This has been Schumer’s game forever. In 2007, Schumer was publicly hemming and hawing about closing the loophole. In 2010, Schumer said he would close it. His party controlled the Senate, the House, and the White House, and could have closed the loophole with no Republican votes. He didn’t.
There was no way Schumer was ever going to close this loophole.
