The Tax Increase in Reform’s Clothing

In a 2011 piece for the New York Times, billionaire Warren Buffett claimed that investment managers are getting “extraordinary tax breaks,” due to the classification of income from managing others’ money as “capital gains.”

“Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’ thereby getting a bargain 15 percent tax rate,” Buffett proclaimed.

Under current tax code, capital gains are taxed at 15 percent, rather than the top tax rate of 35 percent applied to standard income. Ultra-progressive Think Progress goes so far as to say taxing at such a low rate represents a “tax loophole,” which “allows hedge fund managers to count the income they make from managing other people’s money as capital gains.”

The simple fact of the matter is that carried interest is capital gains, and any “reform” to carried interest rules is simply an increase in capital gains tax rates, and low rates aren’t an anomaly. Historically, capital gains have always been taxed at a lower rate than standard income.

While Buffett’s public sentiments might play over well with the sympathetic mainstream media, they ring hollow. Buffett’s firm, Berkshire Hathaway, owes back taxes back to 2002, and has outstanding tax issues from 2005 to 2009. Billionaire Buffett’s talk about participating in “shared sacrifice” is rich, considering his company’s serial tax evasion.

Warren Buffett’s father, the late Rep. Howard Buffett (R-NE), subjected legislation to a simple test, “Will this add to, or subtract from, human liberty?” Warren, a liberal Democrat, is a far cry from his father’s libertarian roots.

Fortunately, the vast majority of the GOP is in lockstep against a capital gains tax increase, meaning its implementation is not likely in the immediate future, but one Representative has openly declared his support of such a measure.

Rep. Jeff Fortenberry (R-NE) has previously expressed support for changing existing carried interest rules, which isn’t surprising, considering his sordid history of raising taxes. In 2008 for example, Rep. Fortenberry voted with Nancy Pelosi to raise taxes on domestic energy production.

That action was the fourth time Rep. Fortenberry voted to raise taxes on Nebraskans in line with Democrats. Democrats have been attempting to raise taxes on capital gains for years. During this year alone at the Tax Policy Center, Sen. Ron Wyden (D-OR.) called to increase taxes on capital gains, taxing these funds as standard income.

“Of course, when you talk about the carried interest loophole, you’re talking about capital gains. And when you talk about capital gains, you’re talking about the biggest tax shelter of all – the one hiding in plain sight,” Wyden remarked, labelling a Republican effort to reduce the current capital gains tax from 23.8 to 16 percent as enabling “gamesmanship.”

In an era of tremendous economic growth and tax reform, it’s important that we lower taxes in order to stimulate the economy, not burden our entrepreneurs and businessmen by hiking them up.

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