From Our Inbox

Trump’s loophole closing wouldn’t soak the rich

Donald Trump may believe he’s the Republican candidate who can best sell a soak-the-rich tax policy to conservative voters. The catch is that his idea will barely get them wet.

Like Democratic candidates Hillary Clinton and Bernie Sanders, the billionaire real-estate developer would revoke a tax break that lets managers of other peoples’ money (mostly private partnerships such as hedge funds, private-equity firms and venture-capital outfits) pay taxes at the long-term capital- gains rate of 23.8 percent, instead of ordinary income-tax rates that top out at 43.4 percent.

Known as carried interest, the tax-code clause is the bane of the left, which sees it as the symbol of what’s wrong in an unequal America where the richest 1 percent pay taxes at lower rates than fast-food workers do. Trump doesn’t need to point out to conservatives that the rich who would be soaked are mostly New Yorkers and Californians.

“The hedge fund guys didn’t build this country,” Trump said in a Sunday phone interview with CBS’s Face the Nation, stealing President Barack Obama’s “You didn’t build that” line. “These are guys that shift paper around and they get lucky. These guys are getting away with murder. I want to lower the rates for the middle class.”

Yes, the carried-interest tax break is indefensible; it rewards some of the U.S.’s wealthiest individuals for simply taking a bite out of outside investors’ gains.

When it was created in the 1950s, the carried-interest break was meant to reward people who put their capital at risk by financing an office building, an entrepreneur’s invention or a startup. The idea was that long-term investors deserve to be taxed at a lower rate in return for their patient capital.

But money managers discovered they could claim the tax benefit when they took their 20 percent cut off the top of the investment returns of their limited partners. That 20 percent usually is in addition to a 2 percent management fee (which is taxed as ordinary income).

Congress has voted many times to end or reduce the tax break, and Obama has sought to delete it from the tax code in numerous annual budgets. It’s still there.

But here’s the thing: The total revenue lost from this tax dodge is less than $2 billion a year, according to the U.S. Treasury. So while the break should be revoked, doing so wouldn’t be the redistributive boon that liberals have implied. The revenue would barely cover what the U.S. spends on food stamps for two weeks, or two days of the Medicare program.

The progressives’ focus on the loophole gives a Republican like Trump the chance to appear populist while requiring little in the way of a real response to government policies that favor the wealthy.

It’s unfair to mislead voters into thinking that getting rid of one tax break could halt the growth of income inequality or raise the revenue needed to repair crumbling infrastructure, fix low-quality public schools, and prop up Social Security and Medicare. It’s just as unfair to lead middle-class voters to believe that ending the same break could lower their taxes as well.

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View.

© 2015, Bloomberg View