Fat-cat tax break is a pure rip-off

The real issue here is neither loopholes nor fairness. It's money! Let's look at the arguments being made in favor of keeping the current disparity.

Eric Solomon, the current assistant Treasury secretary for tax policy, sees the tax treatment of carried interest as "consistent with our goals" of encouraging investment and reducing distortions in the economic system.

Former Treasury Secretary John Snow, now the chairman of Cerberus Capital Management, a private-equity firm, fears a negative effect on investment behavior if the law is changed. His position is that income that represents a return for risk-taking deserves to be treated as capital gains for tax purposes.

I know a lot of trial lawyers who take cases on a contingent basis who would love to have that concept enacted throughout the tax code. They currently pay up to the maximum 35% rate.

The catch in threatening to move offshore

Some supporters of the current system fear a change would encourage some funds to move offshore. I guess they missed the part of the tax code that taxes income wherever it's earned. Unless managers give up U.S. citizenship, moving the fund out of the country would have little or no effect on their tax bills.

Others are concerned with unintended consequences. The newest bugaboo is that increasing the taxes the managers pay would cut the investment returns of pension plans that invest in such funds. The fear is that any increase in taxes would be made up by increasing management fees for the funds.

I don't buy the logic. If having private-fund managers pay lower taxes so that investors can generate higher returns is a wise idea, why tax corporate bosses at up to the 35% rate? In fact, carry the logic to its natural conclusion and we eliminate taxes not only on the managers but on the corporations as well.

The odds are that big money will win

What's going to happen under a new administration and new Congress? Probably nothing but a lot of sound and fury with little change.

Wall Street provides a tidal wave of cash to political parties and candidates that drowns out all arguments for a level playing field. Nine of the 10 largest business sources of campaign cash were financial-service workers, according to the Center for Responsive Politics.

Sen. Charles Schumer, D-N.Y., is the top fundraiser for Senate Democrats. His solution to killing the fairness proposal is to expand the legislation to cover other investment partnerships such as oil-and-gas, real-estate, timber and agriculture investment vehicles. Open the floodgates to the lobbyists for those industries and the proposal will continue to go nowhere.

Maybe I'm missing something here. Compensation is compensation and should be taxed as such. Arguments to the contrary are mere cant. But once again, we're talking money, not economic logic.

On one side of the money issue are managers who will suffer horribly if their $200 million in annual compensation is taxed the same way you pay tax on the $40,000 you slave to earn. On the other side we have politicians (from the Greek, poly, meaning many, and tics, meaning bloodsuckers) who crave donations to fund their campaigns.

Here's an idea: How about we put a tax on political contributions? For every dollar given to a political candidate, you have to send another dollar to the Treasury to reduce our national deficit. At least that way, your political contributions will have a positive effect on our economy. As for the carried interest quandary, everybody knows what should be done. The question is whether there will ever be the political courage to do it.

Updated Dec. 11, 2008

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