That’s where the money is

I am not in any way an expert on tax law. It makes my head spin. The tax code
is so intricate, so finely detailed, so built for those who can afford to hire
tax attorneys, that for most normal people it is well beyond comprehension.

That is why I turn to smart guys like Doug Holtz-Eakin, the former Congressional
Budget Office director, to help me make sense of what politicians are
trying to do take more money away from taxpayers. And Doug has put together an
illuminating paper on the unintended consequences (or perhaps intended
consequences; I can never tell with these Democrats) of the new carried
interest tax proposal being debated as part of a tax extenders bill
that is on the floor of the Senate.
The impact on the economy is most likely going to be negative. Most who are in
partnerships now will likely hire lawyers who will find ways to do business
without being subject to this new tax.

The money that investment and real estate firms should be putting back into
investments in new ideas or products or by buying new real estate or building
new buildings instead will be spent on lawyers who will try to find ways to
avoid paying the new tax. Instead of hiring workers to build things, this new
tax will inspire the hiring of lawyers to the impact of the law.

As Doug and his colleagues at the American Action Forum put it: “Taxing carried
interest is not a matter of fairness or closing loopholes. Increasing taxes on
carried interest would constitute a potentially large tax increase on
partnerships — especially in finance, insurance, and real estate — both in
dollar terms and relative to the income generation of the affected partners.
The specter of these tax implications will spawn reactions ranging from legal
restructuring to crowding out valuable real economic transactions that are not
sufficiently profitable to carry the additional burden. Perhaps most damaging,
the higher taxes on carried interest will re-allocate managerial talent, as the
entrepreneurially inclined are deterred by these higher taxes and seek their
outlets elsewhere in the economy. The proposed tax treatment is inconsistent
with basic principles of tax policy.”

The reason the Democrats are doing this is not based on high-minded ideals or
solid tax policy. It is because they want more money (and this provision would
raise a substantial chunk of change) to pay for bigger government.

It was interesting last night in the primary elections. Nobody who won
campaigned on raising more taxes in such a way as to inhibit economic growth,
all for the ostensible reason to grow government bigger. In fact, the one
candidate who hewed closest to that message, Bill Halter, who ran a campaign
from the left to topple Democrat Blanche Lincoln, got beat in a Democratic
primary.

Harry Reid, who faces a tough reelection campaign against a conservative
anti-tax candidate, has promised to push through the job extenders bill, which
includes this job-killing provision. I think this one provision is a further
example of why Reid and many of his colleagues may very well lose this coming
November. The American people don’t want job-killing tax increases, no matter
how cleverly the Democrats may try to hide them in intricate, complex and
opaque language.

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