Tax & Election Seasons Create Alternative Altercations in the US

rainingarrowsThe end of tax season and the start of Hillary Clinton’s campaign for President nearly coincided this year, and that gives rise to some thoughts of concern to alpha hunters.

At one of the earliest events of her now-official campaign, the former Secretary of State denounced the use of capital gains tax rates by hedge fund managers. Specifically, at a roundtable in Monticello, Iowa on Tuesday, April 14th, she said, “And there’s something wrong when hedge fund managers pay lower tax rates than nurses or the truckers I saw on I-80 as I was driving here over the past two days.”

Yes, (to answer the first obvious question), the candidate did drive herself to Iowa from New York.

But it seems unlikely that this thought occurred to her on I-80. I’m guessing the statement was written well in advance and the speechwriters simply looked at a map to find the relevant highway for that reference. It’s a picture-perfect political/rhetorical reference: it seems specific but operates generically. When she speaks in Concord, New Hampshire, she can simply change the number from I-80 to I-89.

Why this complaint, why now? We can rule out, I submit, the view that this was the result of pent-up personal passion about unfairness. Some of Clinton’s best friends, and her son-in-law, are hedge fund managers. Further, if the taxation of carried-interest struck her as unfair while she was a resident of the White House she seems to have kept it a secret. Heck, she didn’t even make an issue out of it (beyond pro forma statements) the last time she ran for president, in the 2007-08 campaign for the Democratic nomination. Nor has the administration of which she was for years a cabinet member fought very hard on this point.

Political Dynamics

In the 2008 campaign, at least early on, it was Senator John Edwards who carried the populist banner, and it was Edwards who identified himself with the cause of treating carried interest as ordinary income. As Edwards’ campaign ran out of gas in the month after the New Hampshire primary, amid gossip (accurate gossip) about his out-of-wedlock baby, the issue of how to tax hedge fund managers — along with their PE colleagues and the others who would be affected by such a shift — faded peacefully away.

Yes, it did flare up again in the Presidential campaign of 2012, because of course Governor Romney, President Obama’s challenger that year, was also one of the founders of Bain Capital.

Despite that, though, the Obama administration, once its second term was secure, quickly lost interest in the matter. The Democratic donor base, after all, includes a large number of HF and PE managers. Consider the state where Romney served as Governor, the state which has since sent Elizabeth Warren to the Senate. The fifth and eighth biggest Democratic-Party donors in the election 2012 in Massachusetts were a pair of brothers, Douglas and George Krupp, both of whom would take a hit from such a reform, as senior partners at Berkshire Realty Investors.

Walter Gilbert, a molecular biologist who is also a very successful venture capitalist, is sixth on the same list.

As a general rule, politicians on the Democratic side benefit by raising the issue of carried interest during campaigns and then quietly letting it die, as their donors expect, when the legislature is actually working on tax bills. The disparity stays in existence and continues to be available to fire up those populist passions again next time around.

An Accurate Complaint

In fairness it should be said that the game is not one for Democrats only, Former House Speaker Newt Gingrich engaged in it when running against Romney in the primary season 2012.

The point, though, is that the history tells us what we need to know about why Clinton is raising the issue again now.

The political/tactical reason is that she worries about a challenge from an Edwards-style populist within her party, and is moving to co-opt it. Elizabeth Warren is the name most talked about in this context.

It is a pity that the issue is employed so cynically because the complaint is perfectly accurate. An expert in tax law, Victor Fleischer, has put it this way:

“[W]e tax profs are not a group that agrees on much — there’s division in the tax academy about income tax vs. consumption tax, corporate tax vs. full integration, territorial vs. worldwide taxation, whether to have an estate tax.” Yet they do agree on this — “carried interest obviously represents a return on labor, not capital.”

So far as the law holds otherwise, the law is, as a Dickens character once observed, “a ass – a idiot.”

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