Carried Interest Tax to Carry Water for Reform?

Republicans embrace more bad ideas on tax reform to avoid spending cuts.


President Trump and House Speaker Paul Ryan

Much of the difficulty Republicans are experiencing in passing tax reform is self-inflicted. They've fallen into a trap of the left by trying to ensure that the much-needed reforms to our outdated and punitive tax code are "revenue-neutral"—meaning the government continues to take just as much out of the economy in taxes going forward.

It's all well and good to avoid increasing the debt, but it's irresponsible to not even try accomplishing this with spending cuts. Deficit neutrality doesn't prohibit all increases in revenue through reform, but it emphasizes the need to address Washington's spending addiction through cuts—the only realistic way to address our long-term debt problem.

But that's apparently too much to ask of Republicans who have boxed themselves in to choosing bad ideas to help "pay for" desired reforms, such as tax cuts and code simplification, rather than debate which government agencies or wasteful programs we could do without. That approach, unfortunately, inevitably opens the door to changes that increase the tax bias against savings and investment—an issue already too prevalent in our tax code.

Hiking taxes on carried interest capital gains is one such proposal. Though there is a lot of inflammatory political rhetoric directed at the tax treatment of carried interest, there's a limited understanding of what it means.

For the many different business ventures organized as partnerships— which often include private equity, venture capital and hedge funds, as well as nonfinancial industries such as real estate—a carried interest is simply the share of a capital gain that is allocated to the general partner. The general partner manages the fund or business, while the limited partners provide investment capital.

Not only do many partnerships pay a management fee to the general partner but also some award a share of the venture's profits above a certain minimum rate (the carried interest) as an incentive to maximize the fund's return. Whereas the management fee is taxed as ordinary income, the carried interest is appropriately taxed as a capital gain. Assuming the partnership's income qualifies as a long-term gain, that means it's taxed at the lower long-term capital gains rate.

Democrats have long sought to tax carried interest not as a capital gain—despite the fact that it clearly is such—but as ordinary income. In fact, they desire to do that with all capital gains. To laymen's ears, that may sound fair, but it's neither fair nor economically sound.

A recent research paper from the American Action Forum found that raising the tax on carried interest "would likely inflict large damage on the commercial real estate sector, diminish its entrepreneurial talent pool, and lead to lower construction and wages in the real estate sector." Penalizing such things as venture capital and private equity funds, which are crucial for launching new businesses and expanding existing ones, would also weaken the economy.

Capital gains are a return for taking risks. Those who forgo consumption today to invest and grow the economy make us all wealthier tomorrow, plus the potential size of their initial investment has already been reduced by the presence of income taxes. In addition, investors—which often include not just wealthy individuals but also pensions and endowments—must risk losing their assets, which justifies treatment that differs from the treatment of ordinary wage income.

Unfortunately, the government imposes multiple layers of taxation on savings and investment, including not only capital gains taxes but also death taxes and taxes on dividends and corporate income. So really, we should be lowering taxes on capital gains, not raising them.

A group of Republicans led by Rep. Richard Hudson recently sent a letter to House Ways and Means Committee Chairman Kevin Brady, who is leading the tax reform effort, urging him not to raise taxes on carried interest capital gains. But it's hard to know how influential Hudson and company will be, because as a presidential candidate, Donald Trump attacked both the tax treatment of carried interest and his Democratic opponent, Hillary Clinton, for her failure to do anything about it while in the Senate.

Deciding that the tax treatment of a capital gain should depend on which partner it goes to is anything but fair. Such politically motivated and arbitrary provisions are precisely what reform efforts should be focused on abolishing.

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  1. “Capital gains are a return for taking risks.”

    That is precisely the point. The General Partner takes no risks since he/she only participates in the upside of the investments through carried interest. This is why carried interest, to the extent it is disproportionate to investment, should be treated as employment income and not as a return on risk-bearing capital. This is the way that it is treated by almost every other country in the world, with the exceptions of the UK (partially) and the US.

    This will reduce the returns to being a GP, which might have an impact on the entrepreneurial talent available to things like real estate, private equity, etc. Frankly, having been a GP for much of my life, I think that the impact here will be small since GPs are already very well compensated. However, if it turns out to be material, then the terms between the GP and the limited partners (LPs) will simply have to be renegotiated, with the GP getting a larger carried interest in the profits of the venture to compensate for the greater tax burden. There is no reason why the tax code should subsidize this negotiation.

    Veronique, in general I agree with your writings, but you are barking up the wrong tree here.

    1. That is precisely the point. The General Partner takes no risks since he/she only participates in the upside of the investments through carried interest.

      Doesn’t matter.

      Her argument is a rationalization for protecting monied interests. Shoot down this argument, she’ll come up with another.

    2. The money is investment income, no matter how you look at it. Taxing it more will reduce incentives to invest, to the degree that it even works, since I suspect that there are numerous ways of compensating general partners that are financially equivalent but still taxed at the lower rate.

      You’re just using the general go-to argument of “let’s tax high income earners more because, hey, it doesn’t matter”. I suggest reading up on some basic Adam Smith to see why that’s a bogus argument.

      1. Missing the point man. There may be good reasons not to increase income taxes, etc. but the rational for not taxing carried interest, as Roger Barris pointed out above, can’t be that it is because they are “risk taking.”

        1. The risk is intrinsic to the investment, so someone is taking the risk. The fact that the money ends up with the general partner doesn’t change that. Now, you can engage in lengthy analogies about how that is or isn’t like salaries paid for by corporations, I’m just saying those arguments are pointless: there is no right answer, and it is absurd to pretend there is one. It is equally absurd calling a failure to replace one arbitrary tax with a higher arbitrary tax a “subsidy”.

          And I can pretty much guarantee you that changing the tax code won’t result in higher revenues; there are almost certainly ways of writing employment contracts and compensation packages that avoid paying income tax rates on these capital gains.

          The whole political discussion is a tempest in a teapot in which different groups posture uselessly.

          1. Mark22:

            I am a retired GP who has worked in Europe for the last 25 years. I can tell you that, absent something like the US/UK carried interest treatment, it is extremely difficult to come up with compensation packages that avoid paying income tax rates on capital gains. Basically, the entire industry outside of the US/UK has been trying to do that for decades and they haven’t succeeded yet.


      2. It’s not investment income. It’s a contingent fee for managing a portfolio. It’s no different than a CEO getting a bonus based on the profits of the company. Or a contractor getting additional fees for getting a project done early.

    3. I do some work with funds on the tax side and I have never been able to see the rationale for carried interest. I support dividend and capital gains preferences, though not as an incentive to invest. Rather I see dividend preferences as compensation for tax business income gets at the corporate level, and capital gains as addressing, very imperfectly, the issue of inflation gains.

      As you point out, carried interest really is in the nature of an incentive fee for services provided.

      1. “I have never been able to see the rationale for carried interest.”

        The rationale is that hedge fund managers, their lawyers and their other beneficiaries on Wall Street contribute vast amounts of money to political campaigns and offer lucrative positions to politicians after they retire from politics.

      2. Look at the other side of the ledger. The capital gain is real, & to the extent the carried interest is a portion of it, why should it make a tax difference how the partners divide it?

        1. This is the only semi-valid argument that anyone has advanced. However, there are plenty of other ways that capital gain gets effectively converted to ordinary income under our tax code. For example, if a manager gets a bonus or incentive fee, based on capital gain and paid out of it, this does the conversion. In fact, all manager compensation (including in corporations), which necessarily reduces the amount of capital gain (including in corporations), effectively does this. So, even this argument fails.

          The reality is that this is another argument about how to make marginally less bad a tax code that is fundamentally flawed. We should have a giant VAT (made progressive by tax rebates to the poor) that taxes consumption and implicitly treats all income the same.

    4. I absolutely agree, Roger, and I would point out that carried interest is indistinguishable from typical equity compensation for other employees, such as employee stock options. Gains on employee stock options are not treated as capital gains. They are treated as ordinary income. (Some other forms of equity compensation are eligible for capital gains treatment, but only by timely election when they are first granted, and only if the recipient actually does take upfront risk by paying non-refundable ordinary income taxes on the value received at the time of the grant.)

      So GPs really are getting a special tax break relative to every other person who receives compensation in the form of an equity interest. It’s hard to see where there’s any justification for that.

      I do think that ordinary income is the fair way to treat equity compensation (speaking as somebody who has received a considerable amount of equity compensation, over the years), and it’s quite obvious that carried interest is nothing more than equity compensation.

  2. Democrats have long sought to tax carried interest not as a capital gain?despite the fact that it clearly is such?but as ordinary income. In fact, they desire to do that with all capital gains. To laymen’s ears, that may sound fair, but it’s neither fair nor economically sound.

    As usual, Reason rises up to oppose to taxing those who Own, while having no problem taxing whose who Labor.

    I’d love to see the exploding head gaskets if the taxing of Wealth instead of Income were advanced.

    1. As usual, Reason rises up to oppose to taxing those who Own, while having no problem taxing whose who Labor.

      America’s tax code is completely out of whack when compared to that of other advanced nations. We pay more per capita in social welfare than almost all of those other countries, yet middle class taxes are much lower, which leads to massive deficits and trade imbalances.

      However, the libertarian solution is not to tax labor more, the libertarian solution is to stop spending on social welfare at European levels.

      Low taxes and limited government, or high taxes on everybody and a social welfare state–those are the only two sustainable options. Pick one.

      1. Most of the taxation in this country is via other avenues besides the federal tax code.

        Money supply inflation is the biggest one. Social Security is another since the middle class never exceeds its maximum income level. Then there’s the myriad regulations on houses and automobiles, occupational licensing, etc.

        1. “Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.”

          — Milton Friedman

          1. I was just going to make this point. Thanks, Milton!

            “The General Partner takes no risks since he/she only participates in the upside of the investments through carried interest.”

            I don’t want to get into too much detail, but A) of course it is investment income, that is true on its face. Where the hell else do you think that money comes from, bake sales (which of course could also be called investment income)? B) Of course it is a risk, the risk being that he could get zero. This is a fundamental flaw with many people’s thought process on these matters. Profit, loss, risk, return, etc., are not solely defined as actual tangible money (as far as money is tangible these days), and their compensation matters in only two ways: are they willing to work for what is offered and is someone willing to pay what is asked.

            “…high taxes on everybody and a social welfare state–those are the only two sustainable options. Pick one.”

            No, that second one isn’t sustainable because gov’ts tend to spend more than they take in. They have to because they keep creating more laws, which means more regulatory costs, more administrative costs, more enforcement costs, etc.

            1. No, that second one isn’t sustainable because gov’ts tend to spend more than they take in

              That isn’t the problem in European welfare states, since they actually keep their budgets fairly balanced: they are required to by the EU, and in some countries, it would even be political suicide not to do this.

              The real problem with choice #2 is that in the long term, countries tend to lose their most productive members.

        2. Most of the taxation in this country is via other avenues besides the federal tax code.

          Did I say “only the federal tax code” anywhere? Did the GP say “only the federal tax code” anywhere?

          Money supply inflation is the biggest one

          The US inflation rate has been fairly low, and money supply inflation only directly affects cash, which accounts only for a tiny fraction of wealth.

    2. That darn Reason! Always siding with capital over labor!

      Why won’t those people look out for the proletariat good common working folk?

  3. I usually agree with the Reason perspective, but couldn’t disagree more with this one. I honestly don’t get the whole concept of taxing capital gains at a different rate than ordinary income. The talking point is that the investor is risking their capital, but you only pay taxes on the net gain, so a loss this year offsets against a gain next year. There’s no way people stop investing because their gains are taxed at an ordinary rate, that doesn’t even make sense.

    1. The “people won’t stop” argument is stupid. Why not just tax, say, cell phones at 100%? Or water? Or electricity?
      People won’t “stop buying them” after all!

      But, of course, investors have plenty of other options of “investing” their money. Political lobbying, for example, is an excellent investment that people would turn more to. That’s the real risk of raising taxes and discouraging investment: you end up corrupting government more and more.

      1. Actually the political lobbying could much more effectively be combated by simplifying the code – it’s the complexity that the biggest problem. A system that taxed all income at the same rate would be ideal. Your response doesn’t at all explain the justification for passive income being taxed less than actively earned income.. please elaborate on that. And I’m not saying capital gains tax should be raised, I think they should both be around 10%. But having two different tax codes, one that applies to working class people and one that overwhelmingly applies to the wealthy, is a legitimate concern. It’s why Warren Buffett (and ALL the super wealthy) pay a lower rate than their employees. Again, I’m not saying they should pay a higher rate, but just don’t understand why capital gains are LESS than ordinary income.

        1. The only good argument in my mind against taxing capital gains as ordinary income is that they’ve already basically been taxed once as corporate income (and for those who want to argue that only applies to dividends, you’re wrong).

          What usually gets heaped on top(see above) is the special pleading for risk taking, but that’s just saying that we want to favor one deployment of capital over another. What’s even more rich is that argument is usually made by the same ppl complaining about mortgage interest deductions.

          Eliminate all production taxes (income and cap gains) and go to a national sales tax and this issue goes away. I don’t care how you (legally) got your money. I only care how much you spend.

          1. For once we agree.

          2. I get your point on double taxation but still think it’s a pretty weak argument. To illustrate, when Mark Zuckerburg or Jeff Bezos cash out of their holdings they’re paying about a 20% tax rate (their companies have paid very little corporate tax at this point because they’re newly profitable, whatever that’s worth). When a doctor or whatever makes $250 K per year they’re paying around a 40% tax rate. I can see how this plays into some of the class warfare stuff – it pains me to ever agree with the left but I can see how this part of the tax code is giving their ideas a lot of fuel. Paul Ryan’s tax proposal actually called for a capital gains rate of zero, which is just giving the left tons of material. Shouldn’t us small government advocates be for a low, consistent, rate? Whether it’s carried out via an income or sales tax is a separate conversation.

            1. Because it isn’t taxed at a 20% real rate, it’s taxed at a 20% nominal rate. Imagine you had a tax deferred bank account(an IRA) with $1000 in it earning 7% with an inflation rate of 7%. After 10 years there’s 2000 in the account in nominal dollars but still only 1000 is real dollars. Is it right that you should pay 400 just to retrieve your principle? Now on top of that imagine that the bank holding your money had to pay holding fees to the government proportionate to the yield they were giving you. That yield is now taxed twice. Fair?

              1. I mean, you’re basically pointing out the fact that inflation, in itself, is a tax. No argument on that. If you’re investing in long-term low interest bonds, or whatever, then you’re basically investing to avoid as much of the inflation tax as possible. I’m looking at this more from the angle of someone who makes enormous wealth with a shorter term investment then pays a significantly lower rate than someone who makes their money through wages. But ok, I get your point regarding long-term investments, I suppose.

                1. Short term capital gains are taxed at ordinary income already, and this still doesn’t address the problem of double taxation. If buffet weren’t the parasite that he is he wouldn’t take charitable deductions on his taxes. He has the balls to whine that he doesn’t pay enough in taxes and yet he actively avoids giving the government any of his money for those “valuable services.” Funny how he thinks he can better deploy those resources but is sure that no one else can.

                  1. Short term is less than one year. If anyone comes into an investment windfall they’re obviously going to wait until more than a year to cash out, in order to pay the capital gains rate. The double taxation argument is legit but that really only applies to corporate stock, which is only one subset of capital gains.

        2. It’s why Warren Buffett (and ALL the super wealthy) pay a lower rate than their employees.

          The parenthetical is a popular but incorrect claim. As income rises, effective income tax rate rises. (There are non income taxes that are more regressive, but we’re talking about income tax, which includes capital gains, here.)

          There are occasional exceptions, but they are exceptions, not the rule. (Some of them are crazy exceptions like people who invest only in muni bonds in order to avoid tax; note that in that case they get lower interest rates that balance things out, but they are avoiding tax to the extent that they’re subsidizing local government by lending at a lower rate.)

          1. As it should be. Still, the fact that individuals in the 250-1m range are taxed almost at the same effective rate as the >1m bracket is insane to me. Lower the rate on the 250-1, and effectively tax the higher brackets more.

            1. Who the fuck are you to decide how much of someone’s life you’re entitled to? The progressive income tax like all things predicated with that word is an abomination. If we’re “all in this together” then everyone should pull their weight by at least paying the same rate if not paying the same amount for those valuable government “services.”

              1. Taxation is theft!! har har!

                1. Great retort. Explain why someone has to give the government 1000 hours of output every year just because he’s productive while someone who is far less productive gets to skate by at 200 (or zero). That’s a big fat kiss for the grasshopper and a giant fuck you to the ant.

                  1. While I enjoy this fantasyland “hours of output” argument, it doesnt track with reality. An engineering CEO designing bridges, helicopters, etc. may take home a cozy 250k a year and put in as many hours as someone sitting at his desk delegating everything, making 30m a year on “risk.”

                    Anyway I’ve already agreed that I would prefer a progressive consumption tax over a progressive income tax. But given that we have it, my argument was based on how I would like to structure it (such that if we’re looking at progressive tax rates, and see that below 250k the rate is about 14% and then jumps up to 22%, i’d rather hit them with something closer to the lower bracket than the higher bracket, based on the distribution effects on total wealth).

                    Your issue seems to be with a progressive income tax in general, not my preferred modification to it. Kind of a separate issue, and since I dont want to defend it I’ll just say that the reason why a flat tax doesn’t work is because poor people can’t live with 25%+ reductions in income, while wealthy people can, distribution can effect the total size of the pie and i think that consolidating wealth in the 1% probably isn’t great for growth, etc.

                    1. In 1944 the highest marginal tax rate was 94%.

                      Ceteris parabus, which do you think is more likely: that people continued to risk their time, effort, and money for $0.06 on the dollar, or that they ceased risking the same?

                      Why, for example, do you think Kennedy advocated and succeeded in getting that rate knocked down to 70% and Reagan got that knocked down to 50% and then down to 28%?

                      Most simply, because at the margin, which is the only place that matters, a much larger percentage of the population, and more importantly, those with the capital to invest, are far more willing to risk their time, effort, and money, such that if they succeed, they get to keep 72% of what they earn vs. 6%.

                      What happens is that the pie grows enormously instead of just sputtering along.

              2. Since we’ve already got the census, bam: Govt Spending / Pop = tax bill.


            2. Still, the fact that individuals in the 250-1m range are taxed almost at the same effective rate as the >1m bracket is insane to me

              Actually, given the kind of social welfare spending we have in the US, the thing that is insane is that the people in the $50k-$250k aren’t taxed the same as the people in the $250k-$1m range, the way it’s done in Europe.

              Right now, you’re essentially trying to subsidize the middle class by taxing high income earners, and that’s just not going to work out on many levels.

        3. If you don’t like the Tax Foundation, then the more left-leaning TPC has their own chart.. To be sure, there are some super wealthy people with low effective tax rates (though sometimes it’s because they’ve had a lot of losses recently), but it’s far from the norm. That’s true even more so now that such a large percentage of the super high incomes are people with labor income instead of rents, celebrities and athletes and executives.

          Of course, people like Warren Buffett who literally have “more money than they know what to do with,” live frugally, and don’t spend it do not add to consumption inequality at all, nor do they reduce the amount of real goods and services available to anyone else. The only risk from that score in them being super-wealthy is that one day they may pass the money along to some wastrel who will consume resources. Another good argument for a (progressive, perhaps) consumption tax.

          1. No, it would have to be a progressive consumption tax – but that really is the only way forward.

    2. I’ve had any number of investments held for ten years or more that, when I sold even at the lower capital gains tax rate, were “under water” simply due to inflation (even at the modest levels we’ve experienced).

      1. Investments are foremost shares in some kind of property, so they aren’t affected by inflation. If you lost money on them after inflation, don’t blame inflation for that; they simply were bad investments.

    3. Reducing expected return reduces the incentive to invest, especially if risk remains the same. Of course all investment isn’t going to stop.

      That’s not the only argument for the different rates. Capital gains tax is essentially on top of the corporate income tax. The corporate income tax already significantly reduces what the pretax capital gain (or dividend) would be.

      1. It’s not any argument. The market should decide the proper level of investment and not the tax code.

        The only good argument for taxing cap gains at a lower rate is double taxation.

        1. I was just addressing the notion that tax increases won’t affect investment decisions. I do find the double taxation argument to be more compelling personally. But I think it is worth noting that the laffer curve is probably significantly lower for investment income than it is for labor income.

          1. So your goal is to maximize government revenues as that is the only purpose of the laffer curve. That’s not a goal that we share.

            1. You have an impressive habit of putting words in other people’s mouths. Really great strawman-building skills. Yes, in Libertopia you wouldn’t even have income taxes so no reason to even think about the Laffer Curve. In the real world, from a practical perspective the economic effects of different types of taxation are noteworthy IMO. I disagree with your assertion that the “only purpose” of the laffer curve is maximizing revenue. The curve does show revenue versus rates, but it’s important to keep in mind the underlying reason for the curve. As rates rise, the behavior being taxed (labor, investment, etc.) decreases until at some point tax increases decrease revenue. The reason I brought up the Laffer Curve wasn’t to advocate for revenue-maximizing rates, but to point out that the evidence suggests that this discouragement effect kicks in quicker for capital gains than it does for labor.

              1. It’s a key libertarian value to be able to maintain the narrative.

                The key point of the laffer curve IS revenue. The point at which you maximize growth is not the same as the point at which you maximize revenue. In fact any rate above zero disincentivizes activity. The inflection point merely illustrates the point at which the decline in activity finally outpaces the growth in rates.

                1. I didn’t say the growth-maximizing point is the same as the revenue-maximing point. My point is that the Laffer Curve reflects the concept of decreasing economic activity as a result of increased taxation. There is no implication from the Laffer Curve that the revenue-maximizing rate is the correct rate to implement, and I never argued that either. If you really want to get your panties in a twist over me using the term “Laffer Curve” to illustrate that investment activity is more sensitive to tax changes than labor activity rather than explicitly stating it, then go ahead. I confess my comments on threads might not be perfectly crafted to maintain the libertarian narrative. You win, you’re the most libertarian guy here, congratulations.

        2. And that’s not even a good argument.

          1. I’m assuming this is replying to NAS’s comment? Hard to see with the threading.

            I don’t see how that isn’t a good argument. Capital gains and dividends are already effectively taxed when corporate income tax is paid. Reducing the rate at the personal level avoids drastically higher effective rates on capital gains and dividends compared to ordinary income. Since you love to tout how evidence-based and expert-deferential you and your team are, this is something a lot of center-left economists would agree with. There are reasons why it isn’t just the “right-wing laissez-faire” USA that taxes capital gains at lower rates.

        3. The double taxation argument is indeed a valid rationale for lower rates on dividends and capital gains, but wage earners are also subject to double taxation.

          FICA taxes start with the first dollar of earnings. Then federal income taxes apply without deduction for the FICA taxes paid. And, if the wage earner does not itemize, state income taxes apply on the same income. Then, when the wage earner buys something, he gets taxed on the sale.

    4. Taxing income is already terrible, and taxing capital gains is even worse.

    5. Yes, of course they stop investing. Because the net risk goes up and the net return goes down.

      Thus, at the margin, which is the only place that matters, when risk goes up and return goes down, people do stop investing.

  4. Reason schmuck #1: “These proposed republican Medicaid cuts are absolutely terrible!”
    Reason schmuck #2: “Why won’t these republicans cut spending?”

    You putzes can’t even your bullshit stories straight with each other.

    1. You accidentally that whole comment, Simple Mikey. Are you trying to demand that Reason become a hive mind, like you imagine every other news outlet to be?

    2. The only person I’ve seen argue 1 is Chapman, who doesn’t actually write for Reason. Him, Harsanyi, etc. just get their columns published here. Also, is every writer supposed to have the same position on every issue? That’s not a defense of Chapman, I just find it odd that people can’t grasp the concept of different writers at the same publication not having the exact same opinions.

      1. Not grasping concepts? That’s where Simple Mikey is a Viking!

      2. You haven’t been reading suderman much lately.

        1. I’ve seen Suderman criticize the bill, I haven’t seen one of the criticisms be “cutting Medicaid is terrible” as Mikey suggests.

          1. Apparently you missed the part where he was whining about the pointlessness of cutting only medicaid and not SS and medicare.

            1. I still don’t see how that qualifies as saying Medicaid cuts are terrible.

              1. “Pointless” is frequently mistaken for “good” in the vernaculat.

    3. Why can’t they want cuts, and also want the cuts to not be terrible? Nothing inconsistent there, as far as you’ve typed it.

      1. My point is that de Rugy is either ignorant or a liar. Either she doesn’t know that a bill that cuts Medicaid spending is being worked on right now (which you would think she would know if she read Steve Chapman’s hysterical whining from just a few days ago), or she does know and isn’t being honest about it.

        1. The overall budget savings from the healthcare bill isn’t going to come close to being sufficient to offset the tax reform (assuming it roughly resembles the basic plan Trump rolled out). So bringing up potential Medicaid cuts in the health care bill isn’t that strong of an argument. Especially because those cuts are pushed so far into the future.

          1. Strawman fight! It also helps to assume static scoring. What was that about laffer again?

            1. The Tax Foundations dynamic models still have the tax plan decreasing revenue, so there’s no need to assume static scoring.

              I’m also confused as to what the strawman is here. De Rugy’s article is about how the Republicans should avoid increasing debt from tax cuts by cutting spending, which they do not seem intent on doing. The Medicaid cuts Mikey brings up are not close to being sufficient to achieve that. So I don’t see how De Rugy’s argument is invalidated.

              1. No.

                What did the tax foundation say?

                The plan would reduce federal revenue by $2.4 trillion over the first decade on a static basis. However, due to the larger economy and the broader tax base, the plan would reduce revenue by $191 billion over the first decade.

                191BB is certainly in the same ballpark as the medicaid savings.

                1. I admit that was a lot smaller than I remembered, I may have gotten the numbers mixed up with their analysis of Trump’s campaign tax plan, which was a much larger cut.

                  That said, it’s still dependent on their analysis being correct (while I do not doubt that the revenue loss would be smaller than the static basis number, they could still be overestimating the dynamic effects. I’d be curious to see if any other outlets have estimated the dynamic impact. De Rugy might be skeptical of their numbers and thus would need to see more cuts beyond the health care bill) and the ultimate bill (if it gets passed at all) maintaining the eliminations of deductions that sparked a lot of backlash when it got announced, but played a significant part in limiting how much the plan added to the deficit. I wouldn’t be surprised is some of those got tossed out.

                  1. You’re virtually guaranteed to not get all the cut in exemptions required, but I’ll take some incremental progress here. Reason seems to reserve its pragmatic incrementalism exclusively to social issues while maintaining its purity on fiscal issues. Although de rugy gets credit for recognizing some of the benefits in trump’s proposed budget.

                    1. Is asking for fiscal policies that overall don’t add to the deficit really being purist and against incrementalism?

  5. It might be difficult sometimes to determine the difference between capital income and ordinary income. The builder who bought the house next door to us, knocked it down, built a new house, and sold the new house. How one would value his time as a cost to generate the final product enabling the profit to be determined and therefore the capital gains is an interesting question. But he invested his time and his money. A general partner of a venture fund does not invest his after-tax money into the fund in exchange for the carried interest. Yes, his carried interest is at risk because the fund might never make any money. But his money is never at risk — because he never invested any. he received the carried interest as non-cash compensation for his efforts in forming the fund, finding the rich people or institutions to invest in it, and as a bonus if his subsequent management efforts prove successful. Ask him whether he believes he has “earned” the carried interest once he finds the investors, forms the fund, and begins investing its money. You can bet your boots he would say yes. Or that he might increase the management fee or pay himself a bonus for better performance if he didn’t get the carried interest. Which would be ordinary income for the current use of his time and talents.

  6. The distinction in the tax code between capital and ordinary income causes more problems than it solves. We should be pushing for lower marginal tax rates and to tax all income at the same rates. That will reduce dramatically the various games people play to try to turn ordinary income into capital income.

    1. Time for a progressive VAT (and elimination of income tax)!

      1. A progessive VAT, meaning taxing an entity at higher rates as its total value added in a period increases? That’d be an accounting nightmare, but even if entities could rely on some easy way to determine when value was added, and didn’t game the timing, you’d still have an incentive to disperse the addition of value into the smallest possible entities. You want to favor less efficient cottage industries?

    2. Eliminate taxation of income period or there will always be the problem of double taxation and all the social engineering that comes with it.

      1. I’m glad we agree on this.

  7. Saw a headline this morning that basically asked: if the GOP can’t repeal or replace Obamacare, what are the chances of tax reform?

  8. Jeepers Cripes, how is any conservative still a Republican? It’s become the hidden tax party!

  9. They’ve fallen into a trap of the left by trying to ensure that the much-needed reforms to our outdated and punitive tax code are “revenue-neutral”

    Yeah, I know that sort of trap – many beautiful women trap me into having sex with them by offering to have sex with me and damn if I don’t fall for it every time. When will I ever learn?

  10. Speaking of taxes:

    California could be poised to set up more generous rebates and incentives for electric vehicle buyers ? and not just affluent drivers cruising in Teslas.

    Assemblyman Phil Ting, D-San Francisco, is pushing a proposal to establish a $3 billion fund to support the spread of electric vehicles with bigger rebates, more programs for low-income buyers and the deployment of more charging stations. It would also deliver discounts at dealerships, eliminating the need for consumers to file for tax rebates.

    Ting said the proposal would give the electric vehicle market an aggressive push and help California hit its ambitious environmental goals.

    “We’ve been able to dispel the notion that you can’t clean the environment and grow the economy,” he said.…..alifornia/

  11. Reducing spending is a great idea, but I’d hardly wish to put off (or worse, make temporary) a rational tax reform on the basis of getting some perfect result. It’s especially close to impossible considering that the President was elected on not touching the biggest spending programs (and then too many in Congress want to increase military spending as well.)

    1. Fair point, but without spending cuts, tax reform that isn’t deficit neutral or close to it is in all likelihood going to be temporary in addition to adding to the debt.

  12. Repeal the 16th, and fuck you, cut spending.

  13. Republicans are fucking idiots when they fall for the “revenue neutral” BS. I mean really, how dumb can you be? You think Democrats give a fuck about being “revenue neutral” with tax increases?

  14. Reason Staff should know that Calvin Coolidge pushed tax cuts as a means of increasing revenue. This was back when the US economy was worth about a hundred billion gold dollars, and the federal budget was roughly four billion. So here we are in the 21st Century, Laffer Curve and all, and this milquetoast, left-right-parroting, anticonceptual article is the best Staff can muster?

  15. I always thought revenue neutral means foremost that it doesn’t add to the deficit. If a policy saves money without cutting programs, they’re not going to invent something new to spend on just for the sake of revenue neutrality, right? Maybe I’m wrong.

  16. Tax all income the same. Favoring investment income is blatant government social engineering via the tax code.

    1. This. One caveat: the appropriate rate is 0%.

    2. The problem is that capital gains and dividends get effectively taxed when corporations pay the corporate income tax. Equalizing capital gains and ordinary income means that investment income is actually taxed at a higher rate.

      1. Corporations should pay a higher rate so that the equity shareholders get limited liability. if they don’t like it, let them own it as partnership that has full liability exposure.

    3. Tax all income the same. Favoring investment income is blatant government social engineering via the tax code.

      True. So, let’s get rid of the corporate income tax, have a flat capital gains and personal income tax set at 20%, and get rid of all federal entitlement programs and their associated regressive taxation.

      How about it?

  17. “Whereas the management fee is taxed as ordinary income, the carried interest is appropriately taxed as a capital gain.”

    That’s one way of looking at it, but there is other ways to look at it that is just as valid.

    Here’s an equally valid perspective: Carried interest is earned in consideration for services rendered, so it is ordinary income.

    Why should a plumber who performs services for a hedge fund investor pay taxes at a rate higher than a hedge fund manager pays for the services he performs for the same investor? Especially since the hedge fund investor only pays taxes on his return net of expenses related to the manager’s fee and carried interest.

    Here’s a superior perspective: Taxation is theft.

    1. >>>Here’s a superior perspective: Taxation is theft.

      Full stop.

    2. Why should a plumber who performs services for a hedge fund investor pay taxes at a rate higher than a hedge fund manager pays for the services he performs for the same investor?

      That analogy doesn’t work. The plumber is not exposed to any risk: as long as he does his job correctly, he gets paid. The hedge fund manager only gets paid carried interest if he does his job correctly and his investments do really well.

  18. I’m sorry, but if someone is getting paid to manage someone else’s business, that’s earned income. Actually, this should not even be an issue since all income should be taxed equally. In the past, the argument could have been made that only inflation-adjusted capital gains income should be taxable, but the inflation rate is now so low that it’s not worth worrying about.

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