This political campaign season is highlighting some deep fissures in our nation’s democratic process. There’s no need to get into a comparison of our leading candidates, or discuss the waning power of the two big political parties, or analyze the rising numbers of independent voters — we’re all thinking the same thing. Our system seems pretty messed up and there’s not even much debate why.
What’s wrong in politics? Money is virtually the unanimous response. There may have been a time where its influence was more subtle and secretive, but it’s not hidden anymore. Billionaires talk openly about their influence over politicians, the special access they have to the halls of power via campaign contributions, the power of their lawyers and lobbyists, and the legislation they have authored and promoted for self-serving reasons. In other countries we’d call this corruption and bribery, but here we just call it “our political process.” This is not the form of representative government our founders envisioned, nor can it be the one we allow to continue.
Perhaps no other policy exemplifies the audacity of the uber-wealthy to blatantly bend our political process away from serving the public good than the “carried interest tax loophole.” This egregious portion of our tax code allows the wages of investment fund managers to be taxed at rates far lower than workers in any other industry. With no legitimate economic or social justification, it is clear that this preferential loophole is the direct result of money’s corruptive influence in politics.
A prominent hedge fund manager who has worked in the industry since the 1970s, Art Lipson, principal of Western Investment, has called for the closing of such an egregious loophole. To him, investment managers earn carried interest as a fee for their labor in handling financials, just as plumbers, doctors or teachers earn income for their labor every day. Except, unlike any other profession, investment managers pay a lower capital gains tax rates on money earned from this labor — a rate that can be as little as half of what every other American is paying. The only explanation for why? Our corrupt tax code.
Lipson is not the only fund manager trying to rewrite the tax system based on fairness and logic. Alan Patricof, the venture capitalist giant who is with Greycroft, has publicly called for the loophole’s closure — as have others from Whitney Tilson in New York to Sam Altman in California.
The only reason this loophole still exists is because the investment fund industry, namely the American Investment Council (led by Mike Sommers and Ken Mehlman), spends millions of dollars on political contributions and lobbying. This high-power team has forced legislators elected to govern into gridlock and inaction. For billions in returns, this is a good deal for these professional influences. But, it is bad for both our economy and our society, contributing to the rise of extreme inequitable distribution of wealth and power. Strong words, yes, but they need to be said.
In times past, we would talk with pride about our nation’s middle class as the engine of our enviable economy. The reason is that in a capitalistic economy like ours, it is the spending of incomes to buy the goods and services of our nation’s labor that sustains growth and employment. The more that incomes are spent, the more businesses will invest and hire to meet that growing demand. Conversely, less spending means less sales.
Generally speaking, it is our wage-earning population, not the wealthy, that spends the highest percentage of their incomes, and therefore drives our economic engine. Rising inequality reverses this process, as more and more money accumulates in the hands of the wealthy, and the real wages and spending power of the average worker decline.
When our tax code is used to serve the interests of the investor class, we are in effect redistributing wealth from workers to hedge fund managers and their exclusive group of wealthy elite while further undermining confidence in our system. It is the exact opposite of prudent tax policy. We have our policy model upside down.
The kind of long-term sustainable growth that makes capitalism thrive is where investment chases spending, not assets. In other words, where incomes are growing across a large segment of society, and their spending desires create opportunities for businesses to expand production, hire workers and invest in new plant, equipment or technology.
It is this kind of investment that our tax code should be striving for, not handouts to multimillionaires so they can drive up the prices of existing assets like stocks or real estate. We need to end tax favors for investors and give them to workers. Ending the carried interest loophole is a good place to start.
Geoff Coventry was a founding member of NetSales Inc. and is currently co-founder and COO of Tradewind Energy Inc. He is a member of the Patriotic Millionaires’ Advisory Board and lives in Kansas.