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Close the Carried Interest Loophole and End Private Equity Abuse
To help pay for vital public investments, Congress needs to end a tax loophole that has allowed greedy private equity execs to pay a lower tax rate than many middle-class Americans.
Blogging Our Great Divide
September 24, 2021
by Brian Wakamo
The multi-trillion-dollar budget reconciliation bill careening its way through the House and Senate represents an enormous opportunity to invest in unmet human and environmental needs and close loopholes that have allowed the wealthy to avoid their fair share of taxes.
One of the most extreme examples of tax privilege is the so-called “carried interest” loophole. This allows wealthy private equity, real estate, and hedge fund managers to claim the fees they receive for their services as capital gains, which are taxed at a rate of just 23.8 percent, instead of the top marginal income tax rate of 37 percent.
As Charles Khan, organizing director at the Strong Economy For All Coalition, pointed out on a recent webinar, if this was any other kind of work — say, a chef charging you a “cooking fee” — it would be transparent to all that it was ordinary income and not capital gains. But wealthy Wall Street fund managers have gotten away with misclassifying their earnings, cutting their tax rate below that paid by millions of our country’s teachers, firefighters, and nurses.
This perverse tax break for the rich is particularly galling for workers whose lives have been devastated by private equity pillaging.
Alisha Hudson, who worked for Babies “R” Us in Kentucky before private equity companies drove the company into bankruptcy, also spoke on the carried interest loophole webinar, which was hosted by the Take on Wall Street campaign. A mother of two small children, Hudson said she had good, flexible, and rewarding employment with the giant retailer until one day, it all came crumbling down.
“Like most of my coworkers,” Hudson said, “I found out about my company closing through social media.” Private equity giants Bain Capital and KKR had bought Toys “R” Us, saddled it with debt, and slowly whittled the firm down into nothing — all while the funds’ executives raked in hundreds of millions of dollars in fees.
Hudson and 33,000 other Toys “R” Us workers lost their jobs without receiving promised severance benefits. Only after organizing through United for Respect to put pressure on the private equity firms did the workers receive some financial support.
Private equity pillaging has only escalated under the pandemic, according to Ricardo Valadez of Americans for Financial Reform. “In sector after sector, private equity owned companies have been responsible for some of the most harmful business practices in the country,” Valadez said. And while they pushed up rents and slashed jobs, private equity firms as a whole were pocketing $5 billion in federal Covid relief, he pointed out.
Dr. Mitchell Li, one of the founders of Take Medicine Back, spoke about how private equity funds have even wriggled their way into emergency care. As an emergency physician himself, he’s seen firsthand how private equity investors have pushed hospitals to cut staff and reduce the level of care provided to people in emergencies.
“These private equity firms actually have been taking these patients — the working poor — to court and garnishing their wages,” Dr. Li explained. “It is private equity moguls and external investors looking to extract profit from a very vulnerable situation.”
Senator Elizabeth Warren has introduced a bill, the Stop Wall Street Looting Act, which includes a wide array of provisions aimed at reining in private equity abuses. These provisions include making private equity executives legally liable for the damage they cause to workers and communities and protecting workers’ rights to severance pay if their employer goes bankruptcy.
The current budget negotiations offer the opportunity to enact one piece of the Stop Wall Street Looting Act — closing the carried loophole. Unfortunately, the House Ways and Means Committee has proposed only minor changes to this part of the tax code, but Senator Ron Wyden, the chief tax writer on the Senate side, has proposed a much stronger fix that would treat carried interest as ordinary income and also require managers to pay an annual tax on accrued carried interest. With enough public pressure, this proposal, which would generate an estimated $63 billion over a decade, could make it into the final budget reconciliation bill.
For Alisha Hudson, who lost her job to private equity, it’s never acceptable for the rich to avoid paying their fair share of taxes. But it’ especially unacceptable, she said “when they engage in destructive behavior that ruins jobs like mine.”