Hillary Clinton vows to almost double the capital gains tax rate of some uber-rich Americans by closing the carried-interest loophole. She mentioned it in the first debate, and those who stand to lose if she keeps that promise continue to support her anyway.
In 2012, the executives and employees of the nation’s four biggest private-equity firms gave Republican presidential nominee Mitt Romney a combined $591,600. This wasn’t too surprising, given that Romney has been a longtime private equity industry insider. Nor did it surprise observers that these same firms gave President Obama’s campaign only $147,031.
My, how times change.
With less than two months left in this 2016 presidential election, Democrat candidate Hillary Clinton has already surpassed Mr. Obama’s efforts by raising $182,295  in direct contributions from the Blackstone Group, Carlyle Group, KKR and Apollo Global Management, according to a database compiled by the Center for Responsive Politics. Meanwhile, these firms haven’t given a cent to this year’s Republican candidate, Donald Trump.
Certainly, as ProPublica’s Alec MacGillis notes, part of the blame here lies in Mr. Trump’s choice of a vice presidential candidate in Indiana Governor Mike Pence. Wall Street firms fear that contributing to the Republican ticket that includes a sitting governor would violate “pay to play” rules that bar firms from giving to state officials with oversight over the pension funds that invest with the firms.
But the tide was turning even before Mr. Trump selected his running mate. For the most part, the private-equity industry has abandoned Mr. Trump because of considerable “anxiety in the higher echelons of Wall Street over what a Trump victory would mean for the country and financial markets,” Mr. MacGillis writes.
Their pivot toward the Democrats is all the more surprising because Ms. Clinton has vowed to close a so-called “carried-interest loophole” that many view as a favorable tax treatment for Wall Street insiders. This loophole applies to the hedge-fund industry, as well as venture capitalists, real estate investment firms, and private-equity firms.
Private-equity firms use the money of from individuals, pension funds, and foundations to buy private companies or to take publicly held companies private, then try to streamline the process to increase a company’s bottom line.  The usual goal is reselling for a profit within 3 years to 7 years.
Typically, the private-equity partners who oversee these takeovers and resell them make money in two ways: a 2 percent fee on the assets under their management, as well as a 20 percent cut of the profits. This cut is the “carried interest,” a term that dates back to previous centuries when ship captains charged 20 percent commission on the goods their ships carried.
The rub is the U.S. government considers this a capital gain, even though it derives from the work done by a private-equity partner in handling others’ money and not his own direct investment. As such, that means a tax rate of 23.8 percent rather than the 39.6 percent rate for the highest earners of ordinary income, according to the September 7, 2016, ProPublica article.
Via PBS NewsHour (Numbers circa October, 2015)
Some support this lower tax rate. One line of reasoning: Private-equity partners contribute “sweat equity” by forming an investment fund, identifying the companies to purchase, and applying expertise to improve those purchased companies over time.
By treating carried interest as a capital gain, the U.S. government incentivizes private equity to take risks, invest hundreds of billions into new and revamped businesses, and to contribute sweat equity to improve those businesses over time.
Opponents of this thinking point out that the partners already get incentivizing rewards in the form of  guaranteed 2 percent fees that don’t qualify as a capital gain. The IRS should treat their share of profits no differently. Whitney Tilson, managing partner of Kase Capital Management, agrees. In 2015, he told PBS NewsHour:
I’m just taking a 20 percent bonus, just like the shoe salesman at Nordstrom’s getting a bonus at the end of the year. So why should I be paying a much lower tax rate than an average guy earning a bonus? It makes no sense.
Publicly on this issue, Hillary Clinton is definitely more in line with Mr. Tilson’s thinking. So much so that she has said that as president, she would close the loophole through executive action if Congress continued to resist a legislative fix.
But from the White House, would she carry through on this promise?
In the past, many politicians and officials have made similar public protestations, after all, and the loophole persisted. Barney Frank,  a former Democratic congressman who co-authored the Dodd-Frank financial reform law of 2010, told Mr. MacGillis: “Clinton should be taken at her word on the issue, regardless of the industry’s campaign contributions. ‘She genuinely believes [in closing the loophole], and they have given her all that money assuming that’s what she believes.'”
Two economic advisers to Clinton also insisted to Mr. MacGillis that voters should take her proposals “at face value.”
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