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Rhode Island | 04/27/2017
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A First Step Towards Rebalancing The System

By Morris Pearl
By
Adam Satchell
By
Aaron Regunberg

With inequality at historic highs in America, political and economic power has become extraordinarily concentrated in the hands of elites, who use that power to re-write the rules of the game in ways that further their interests.

There is perhaps no policy that better embodies this reality than the carried interest tax loophole.

The carried interest loophole allows private equity and investment managers to pay taxes on their income at capital gains rates rather than as normal income -- meaning they get away with paying a fraction of what every other working American pays.

A low capital gains tax was originally justified because of the risk involved in investing your own money. But today, investment managers earn their (extremely large) fees from investing other people's money rather than their own. Labeling those fees as capital gains is a tremendous stretch -- and so, as a result, we have a loophole where billionaires get a lower tax rate than kindergarten teachers and truck drivers.

There is bipartisan support to resolve this disparity. Indeed, both Hillary Clinton and Donald Trump committed to closing the loophole. Unfortunately, Trump's pre-election rhetoric of "getting tough on Wall Street" seems to have been just that. With an administration stacked to the gills with Wall Street insiders, there is little sign of a push to solve this problem at the federal level.

That's no surprise. Every time reform is attempted, lobbyists flood the DC offices of elected officials and wealthy donors pick up the phone to make sure loopholes like carried interest stay open. But while the Washington agenda may still be bought and sold, officials in Rhode Island have the opportunity to step in and make a change ourselves.

State legislatures can pick up where Congress is faltering, by "repatriating" the lost revenue in the federal loophole. Rhode Island's private equity and hedge funds earn $402 million per year in under-taxed carried interest. A state bill to recapture fair-share tax rates would provide an estimated $40 million per year that could go straight into funding Rhode Island's most critical needs, like school infrastructure, higher education, and more.

That's why we introduced H 5563/S 0259, which would establish a 19 percent fairness fee for investment management services in order to tax the carried interest income of hedge fund and private equity investors as traditional earned income, and which would only take effect if similar legislation also passes in New York, Connecticut, Massachusetts, and New Jersey -- states that have the highest concentration of investment managers.

This is fundamentally about fairness. Carried interest is a fee for providing services, just as doctors earn income for treating patients, or teachers earn a paycheck for teaching our young people. There is no reason why an investment manager's fee for doing their job should be taxed at a rate so much lower than every other regular wage and salary worker.

It is time to reclaim the meaning of fair in our tax code. It is time to close the egregious carried interest tax loophole.

Morris Pearl is the Chair of the Patriotic Millionaires and a former managing director at BlackRock. Adam Satchell is a Rhode Island State Senator representing District 9. Aaron Regunberg is a Rhode Island State Representative representing District 4.

 
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