Remain vigilant: Trump “reforms” will tempt Democrats – “Carried Interest”
Many among the 53% of all voters who did not vote for Donald J. Trump are counting on the leadership of Senator Charles Schumer (D-NY) as one of the last lines of defense against the President-elect’s legislative agenda. No doubt there will be moments when the new Senate minority leader will marshal his democratic colleagues to block legislation. However, when it comes to matters of finance and banking, Senator Schumer is no progressive, and his willingness to work with the incoming President is worrisome.
In recent days, the Democratic senator has voiced his support for Mr. Trump’s proposal to eliminate the “carried-interest” tax provision, which benefits investment managers who specialize in private equity and real estate. This provision of the tax code converts income earned from private equity or real estate funds into capital gains. Through the magic of the tax code, those gains get taxed at 20% instead of 39.6%. At first blush it seems that the President-elect and Senator are reformers because they’re in favor of closing a Wall Street loophole. Don’t be fooled. Financial interests fund the Senator’s political clout (see, the chart immediately below), and Messrs.’ Trump and Schumer aren’t crossing a key constituency.
The President-elect’s tax proposals eliminate the benefit of the “carried interest” provision. When the tax rate on ordinary income drops toward the tax rate on capital gains, the loophole becomes a meaningless appendage. The President-elect can look like a reformer, and Senator Schumer can oppose the source of his political wealth without suffering any consequences.
Much of the President-elect’s agenda is going to cloak invidious proposals in apparent reforms. Many Democrats will be tempted to join in the ruse. Remain vigilant.