Tax Writing Panel Puts ‘Carried Interest’ in Context

There’s something oddly comforting about listening to an intelligent debate about fiscal policy from elected officials, even if there is no clear resolution. And no, you won’t find it in the presidential debates.

It’s the House Ways and Means Committee that has perfected this rational dialogue. It was on display last week at a four-hour markup where members readied a slew of niche tax bills for floor votes.

These guys have spent a lot of years sparring, so it shouldn’t be a surprise that their conversation has a certain musical quality to it.

The tax writers in Congress are grappling with a few big questions. The first is how to get to a place where comprehensive tax reform is politically and practically viable. Everyone wants this. The second is whether the smaller steps along the way are hurting or helping the bigger goal.

These questions aren’t easy to answer, committee members agree. They also agree that big ideas shouldn’t be ignored in smaller debates about individual tax provisions.

As such, the Ways and Means’ conversation about the “carried interest” tax loophole, a recent obsession among Republican presidential candidates, is a lot different than the talk on the campaign trail. The tax writers don’t portray carried interest, the tax treatment of financial advisers’ commissions, as a surrogate for the entire tax code. To them, it is one cog in a giant tax machine.

Meanwhile, Donald Trump is taking a lot of pleasure in publicly deriding the “hedge fund guys,” who currently pay a lower rate on their commission earnings than your average salaried employee. Trump has single-handedly enlivened this 10-year-old side-show debate about the tax loophole, which Democrats have long argued should be eliminated.

Carried interest has dominated the presidential candidates’ conversation about economic policies. But the tax universe is exponentially bigger. Carried interest allows financial professionals’ commissions on clients’ investments to count as capital gains instead of earned income. Requiring financial advisers to count those earnings as income, a higher rate than capital gains, would add about $15 billion to government coffers, according to the Joint Committee on Taxation. That’s not chump change, but it’s nothing compared to any comprehensive tax plan worth its salt. A comprehensive overhaul would involve $1 trillion to $3 trillion of taxpayer dollars.

Yet for Trump, that seems to be all there is. The rest of his tax plan is more or less a mystery.

Jeb Bush has done the best job among White House seekers of outlining a bigger tax plan. Like Trump, Bush also calls for eliminating the carried interest loophole. But he also proposes lowering corporate rates and capital gains taxes, which would likely mute the impact of ditching carried interest. He also would smooth out individual income tax brackets. Bush’s plan would cost the government somewhere between $1.5 trillion and $3 trillion, depending on how it’s scored.

Give Bush credit for tackling the whole tax animal, even if the campaign trail commentary centers on carried interest.

In contrast, members of the Ways and Means Committee never lose sight of the bigger context when discussing carried interest, or other individual policies, for that matter. Democrats say carried interest should be eliminated as a way to balance out the cost of other less controversial tax breaks that are annually expiring and then temporarily extended. Chairman Paul Ryan (R-Wis.) says carried interest should wait until the committee undertakes comprehensive tax reform.

Democratic members, many who have served decades on the committee, tend to function as a single unit with a single message during markups. Last week, they had just one complaint about Republicans’ proposal to make permanent an array of expiring business tax breaks. This “extenders” package isn’t paid for, they said. They argued that each of these smaller tax breaks will be needed as crucial leverage points in a broader debate that will inevitably result in winners and losers. Why give away the farm now?

“We’re going to make it impossible to do what this committee did in 1986,” said Rep. Jim McDermott (D-Wash.), at Thursday’s markup. That was the last time there was a permanent overhaul of the tax code, and it took six years of painstaking negotiations.

Like many Democrats and tax analysts, McDermott is skeptical that the big conversation will ever happen. So the choices in small tax code tweaks really matter. “What we’re seeing here is packing into the law everything that anybody could possibly want in the law,” he said. “We’re packing it into the law. Never discuss it again. The debate is done.”

He has a point. Lobbyists who remember the 1986 tax reform say it’s hard to imagine a similar process now. Could crucial trade-offs among major stakeholders hold steady through several election cycles in today’s world with a 24-hour news cycle and hungry Twitterverse?

But Ryan is nothing if not passionate about his growth-oriented vision for overhauling taxes in a big way. He’s also meticulous about his strategy for doing so. Most Republican lawmakers are happy to embrace his vision even though it may not be successful. At least he’s trying.

The extenders package is a precursor to bigger actions, Ryan argued. The changes the committee approved for floor votes would rationalize the current tax code by locking in a popular tax language that encourages business investment. That, in turn, would make an overhaul of the whole tax code easier.

“We are seeing reality and bringing the baseline to where we want when we reform taxes,” Ryan said at the markup. “We all think this is good tax policy.”

Rep. Sander Levin (D-Mich.), the committee’s top Democrat, used a folksy way of communicating the well-honed response from his party. “You can’t do tax reform helter skelter,” he said. “That’s what you’re doing.”

Democrats knew going in to the markup that they were outnumbered, that each of the small tax provisions on the agenda would be approved. Their protest isn’t about the actual bills, which many of them agree with and some even cosponsor. It’s about the overarching economic philosophy.

That’s where carried interest came in. Democrats used it to talk about its cost to the government and by extension, the middle class worker. To make this point, they offered an amendment to tank carried interest. Knowing it would be voted down, they used it to drive home their point that when tinkering with the tax code, one tax break should be exchanged for another to keep the Treasury’s revenue streams more or less even. The revenue currently lost by the carried interest loophole “further highlights just how much inequality exists in our nation’s tax code,” Levin said.

Should a comprehensive tax rewrite ever hit center stage, these guys are the ones who will be putting it together. They are ready. Their talk about carried interest, along with lots of other tax adjustments, always refers back to the bigger picture. On the campaign trail, not so much.

Morning Consult