Sander Levin "Carried Interest" Bill a Pledge Violation

Late last week, Congressman Sander Levin dropped a bill, H.R. 2834, which is a blatant violation of the Federal Taxpayer Protection Pledge.

His bill would raise the tax rate on "carried interest" from 15% to 35%. This violates a fundamental tenet of the Pledge, which states that the signer will, "...oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses."

"Carried interest" is just a technical term for investment income that a private equity manager receives from the investments under his direction. Compensation is structured this way to give the manager maximum incentive to get the highest rate of return for all the investors. Since he himself only does well if the investors do, all of the best incentives are in place to get very healthy returns.

Levin's bill would tax this capital gains income at a 35% rate. His reasoning is that all "compensation" should be taxed at the same rate. We'd agree if by this he meant lowering the top marginal tax rate to 15%, but that's not what he wants to do.

This logic is highly-flawed. The reason why capital gains income is taxed at lower rates is because it is a double-tax. By all rights, the most "fair" tax rate on most capital gains should be 0%. Capital gains represent a second layer of tax on after-tax corporate income (which has already gone through a 35% corporate income tax filter). Wage income, by contrast, is deductible as a corporate business expense. It is taxed once and only once. Capital gains income is taxed at least twice.

Making this double-taxation of capital gains worse is horrible tax policy. Capital gains derived from corporations should be free of all individual-level taxation. Only this would equalize the treatment of this income with wages. Going in the other direction is not only a violation of the Pledge--it simply betrays an utter ignorance of basic tax policy.

This should be called out for what it is--a money-grab, and an incrementalist attempt to tax all capital gains as ordinary income. The line must be drawn here.