After the surprise agreement on a new reconciliation bill last week, Democrats may be on the verge of effectively closing a notorious tax loophole—a step that reformers have been demanding for many years.
If this were a Hollywood franchise movie, we’d be at the stage where the authorities have the scary monster surrounded, and it appears to be in great danger. In Washington, the villain is the carried-interest deduction, a notorious loophole in the U.S. tax code that allows some of the wealthiest people in the country, the managers of private-equity funds and hedge funds, to pay an artificially low tax rate on much of their income.
In an era of heightened inequality and middle-class income stagnation, the carried-interest deduction is such a glaring scam that three Presidents in a row have vowed to eliminate it during their campaigns: Barack Obama, Donald Trump, and Joe Biden. With the aid of its protectors on Capitol Hill, who are mainly but not exclusively Republicans, the loophole has survived. After escaping the Obama Administration unscathed, it received a cosmetic trim in the G.O.P.’s 2017 tax reform.
The main question is whether this structure will survive and make it into the final version of the reconciliation bill. “The private-equity industry spends tens of millions on lobbying every year,” Steve Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, told me on Monday. “Private-equity funds own companies in practically every congressional district across the country, and they weigh in, too.
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