Aim Higher to Close Tax Loopholes and Create Jobs

by Reggie Oldak, Senior Counsel,
National Women's Law Center

We told you before Memorial Day that Congress was taking aim at a major tax loophole that allows extremely wealthy investment managers to pay lower taxes than teachers, nurses, and other hard-working Americans. They’ve lowered their sights, but we’re still working for a strong bill that will meet the urgent needs of unemployed women and men, and shrink tax preferences for the very rich and corporations.

The House voted in December 2009 to eliminate the "carried interest" loophole, taxing investment fund managers on their compensation at the same ordinary income tax rates that everyone else pays—up to 35 percent instead of the 15 percent rate for capital gains. A compromise provision in the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213) passed by the House on May 28 would partially close the loophole: ordinary income tax rates would apply to 75 percent of earnings, and 25 percent would still be taxed at the lower capital gains rate. While there’s no tax policy reason to prefer one group of earners over another, especially in a bill so ambitiously titled, this compromise also had been endorsed by Senate Finance Chair Max Baucus (D-MT).  After three occasions on which the House had passed a bill closing the loophole, only to see it die in the Senate, the prospect of getting three-quarters of a loaf out of the Senate made us giddy.

Unfortunately, the version of the bill now before the Senate is even weaker. Under the substitute amendment introduced on June 8, the amount of carried interest income that would be taxed as ordinary income decreased from 75 percent to 65 percent, and the amount treated as capital gains increased from 25 percent to 35 percent. For gain or loss attributable to the sale of an asset held for seven or more years, only 55 percent would be taxed as ordinary income and 45 percent would still be treated as capital gain. At the last minute, industry lobbyists succeeded in weakening the provision even further, with a complete exemption for gains on the sale of interests in energy-related partnerships, mainly oil and gas pipeline operators.  Both the Senate and the House provisions would be phased-in over time, with the income taxed as 50 percent ordinary and 50 percent capital gain for the two years starting January 1, 2011. 

The December 2009 House provision would have raised $25 billion over 10 years. The compromise provision passed by the House on May 28 would have raised $17.7 billion. According to the Senate Finance Committee, the Senate’s modified proposal would raise $14.157 billion over 10 years. They’re moving in the wrong direction! 

Adding insult to injury, Sen. John Thune (R-SD) introduced the Republican alternative: don’t close the loophole at all. While the bill fully maintains the multi-billion dollar tax break for super-wealthy investment fund managers, it drops additional funding for Medicaid, COBRA subsidies to help jobless workers maintain health care, and an extension of the TANF Emergency Fund to create jobs and help families in crisis. That makes no sense at all.