Boston 2024’s shadow government of connected players

Posted on by j.giglio

Boston Mayor Marty Walsh opposes a referendum on whether Boston should host the 2024 Summer Olympics. So does state Senate President Stan Rosenberg, who says people should trust elected representatives when those officials say they won’t support public money going to the Olympics.

But it’s hard to have much trust in what increasingly looks like a money-grab by a shadow government of connected players.

The MBTA’s recent meltdown under the weight of snow and ice allowed Boston 2024 to argue that the Olympics could be a catalyst to upgrade the area’s public transit. But fixing a system that owes nearly $9 billion in debt and interest and with a maintenance backlog of at least $6.7 billion could cost real money.

At first, Boston 2024 organizers claimed that taxpayers’ only Olympic-related cost would be transportation improvements already in the pipeline. But it turns out they meant any projects included in a $13 billion bond bill Gov. Patrick signed last year. The problem is that bond bills only authorize the commonwealth to borrow money, and just a fraction of the projects in them actually fit within state borrowing limits.

Moreover some of the projects in Boston 2024’s successful bid to the U.S. Olympic Committee aren’t in the bond bill at all, and only a portion of the included projects are actually funded. Building them all would roughly double the $4.5 billion backers claim taxpayers would have to kick in to host the games.

Then there’s the cost of operating and maintaining the assets, which advocates routinely ignore, even though it’s far greater than the initial construction costs over the life cycle of the assets. Remind you of the MBTA?

The people Boston 2024 is bringing on don’t exactly instill confidence. With former Gov. Patrick no longer in power, his supporters’ access to jobs and lucrative consulting gigs is dramatically diminished. Boston 2024 is looking a lot like a lifeboat for a government in exile.

Both Gov. Charlie Baker and Mayor Walsh were blindsided by the announcement that Patrick would serve as a “global ambassador” for Boston 2024. An annoyed Walsh called on the group to come clean about their payroll. When they did, it was unseemly at best to learn that Patrick will earn a mind­ boggling $7,500 for each day he spends traveling on behalf of Boston’s Olympic bid.

He certainly is surrounded by familiar faces. Richard Davey, his former transportation secretary is Boston 2024’s $300,000 per year CEO. His former political consultant Doug Rubin is collecting $15,000 per month and John Walsh, who headed the state Democratic Party under Patrick, is making $10,000 per month. All told, Boston 2024 has 16 consultants on the payroll, in addition to 10 employees earning a total annual salary of $1.4 million.

The fact that Patrick’s second term was a management debacle further diminishes confidence in Boston 2024’s ability to safeguard taxpayer dollars. It was beset with scandals at the Department of Children and Families, the Department of Unemployment Assurance, and the state drug lab, among others. The more than $750 million budget gap Gov. Baker had to close soon after taking office was largely the result of the Patrick administration’s mishandling of the commonwealth’s Affordable Care Act website.

All this is in an effort to land the Summer Olympics, which, since 2000, have cost an average of more than $19 billion to host. Boston 2024 says taxpayers will only need to kick in $4.5 billion but final costs have averaged about three times the estimates included in initial bids during that period.

Under the best of circumstances, hosting the Summer Olympics is a pretty sketchy proposition. But when billions of dollars are on the line and the effort is in the hands of what amounts to an unaccountable shadow government, taxpayers should have the right to guard their own wallets, not trust that elected officials will protect them.

originally published: March 21, 2015

Healthy pork: Earmarks may help solve transportation problems

Posted on by j.giglio

The American Society of Civil Engineers recently estimated that traffic bottlenecks will cause a $1 trillion loss in sales over the next eight years. The report makes the point that America can no longer put off dealing with the growing backlog of transportation projects whose costs have long outstripped the dollars the existing transportation funding mechanism generates.

It should be noted that these are the same people who published the 2013 report card that gave America’s infrastructure a grade of D+. They obviously have never heard of grade inflation.

With the current highway bill set to run out of money by May 31, the current report comes as federal lawmakers are debating a new transportation funding bill. Congress has struggled to come up with a transportation funding bill that funds needs beyond those that can be addressed with revenue from the 18.4-cent-per-gallon federal fuel tax, which has not been increased since 1993.

While the infrastructure community is holding its collective breath for Congress to agree on a bipartisan solution, perhaps it is time to revisit the use of limited earmarks to lubricate the legislative process.

Earmarks are congressional directives that money be spent on specific projects, which are often derided as “pork barrel” projects. They basically ended in 2011 after the public outcry about a $223 million earmark to fund the construction of a “bridge to nowhere” in Alaska.

Critics argue that earmarks are basically used to buy votes, curry favor with special interests and help politicians get re-elected by showing constituents they are bringing home the bacon even when America is broke. For sure, there are plenty of people who say that earmarks are pork and the money is being wasted.

To further add to the demonization, they claim it’s ad hoc policymaking at best and illegal graft at worst. For them, earmarks are like a four-letter word and are reflective of congressional corruption, even if they help legislators overcome ideological differences and pass major legislation by earmarking money to buy key votes from recalcitrant colleagues.

Like it or not, earmarks and horse trading are part of the human condition and for ages were part of the legislative process at every level of government. Trading for votes in Congress, not to mention lubricating the process with funding for special projects that the legislators in question consider important, has always been an essential element of American democracy. Since when has the average politician made a virtue out of surrendering his or her career for putting the country’s interest first?

Let’s not get hung up on appealing to the better angels of human nature. Legislators put pragmatism over principle. As that prolific writer Anonymous said: They understand that when you have to choose between voting for the people or the special interests, stick with the special interests. They remember; the people forget.

Stained-glass, Pollyanna-ish types may cringe and complain that this is little more than bribery, the distribution of taxpayer dollars based on political considerations rather than merit. If the use of such a pejorative term makes them feel nobler, so be it. You get merit in the afterlife; here in the present you get politics. As former House Speaker Tip O’Neil once quipped, “I’m against any deal I’m not in on.”

Far from being ashamed of earmarks, proponents argue that lawmakers are a better judge of what benefits their districts than unelected bureaucrats. They ask if we really believe that the bureaucrats responsible for fiascos like the Veterans Affairs scandal and the screwed-up Obamacare rollout should control allocating taxpayer dollars.

Would it really be a mortal sin to reintroduce some limited bribery to grease the legislative process and smooth over differences that preclude in this case the transportation funding shortfall? In the current environment of gridlock, it may be exactly what the country needs. 

originally published: March 14, 2015

The MBTA’s snow job: Lack of accountability

Posted on by j.giglio

Amid endless discussion about the MBTA’s damnable inattention to maintenance and its indulgent over expansion, accountability has not been mentioned as one of the causes of the T’s meltdown. Lack of accountability may in fact be the organization’s biggest weakness.

A raw fact of life is that the public sector is awfully good at ducking accountability. It’s no wonder then that people feel increasingly distrustful of political institutions. And the governor has now created the obligatory commission to assess the MBTA’s problems and make recommendations for fixing them, a Sisyphean task to be sure. One can only hope they will address the question of why this essential, non-discretionary service has consistently failed to be accountable to its customers.

In the meantime, thousands of disgusted customers are demanding refunds for a service that was not rendered. They want the MBTA held accountable for failing to keep their promise to provide the safe and reliable service that, to many, is just as basic as access to water, education and health care.

At the heart of accountability is a promise that obligates you to a course of action. When you are paid for a product or service, you are accountable for delivering it. If you don’t fulfill your promise, you are expected to take responsibility for failing to deliver on it and expected to compensate the other party. This creates a modicum of credibility; a promise made is a promise kept.

Sure, the MBTA board of directors is not responsible for creating private gains, their quasi-public structure means the MBTA has no owners to whom the board is primarily accountable. But they are accountable to taxpayers and customers for creating societal benefits and satisfying the promises made to their multiple constituencies.

If board members are confused about how and why they should be making good on this promise, the new commission should figure it out for them. Commission members should also keep in mind that they cannot expect the MBTA board of directors to perform surgery on themselves. The commission would be wise to recall Einstein’s words that you can’t fix today’s problems with the folks who created the problems in the first place.

One obvious imperative for the nice people on the MBTA board is to acknowledge their failure to deliver a basic service. The stewards at the MBTA can’t make up for lost wages and all the other collateral damage done to the average Joe and Jane. But if they are serious about customer service and want to be viewed as legitimate, they should move at the speed of light and provide customers with refunds for the services those customers haven’t received. What’s to discuss? Just do it.

Even better still, going forward, a money-back guarantee would make public transportation much more attractive to customers and also be the acid test for accountability. And why not a money-back guarantee, it is routinely used by successful private firms that distribute goods and services though the marketplace.

Of course, this principle can only be implemented after Hercules has cleaned out the Augean stables at the MBTA. To expect anything less is to be as amateurish as the folks who are currently in charge.

originally published: February 28, 2015

Intellectual dishonesty and the MBTA

Posted on by j.giglio

The bacchanal of charges, counter charges, accusations, and recriminations concerning the MBTA’ s highlight-reel non-performance  over the last several weeks is redundant. In sum, you would be right to conclude that a lot of people had a lot of years to get a job done and failed to do it, and that failure haunts the region in numerous ways.

Of course the public is told that this crisis is the equivalent of a “Sputnik moment,” a blessing in disguise, a wake-up call for elected officials to redouble their efforts to reimagine and modernize the MBTA.

Let’s hope so.

One is reminded that after Winston Churchill’s electoral defeat in 1945, his wife tried to cheer him up. “It might be a blessing in disguise,” she told him. “At the moment,” he replied, “it seems quite effectively disguised.”

A cynic might be forgiven for insisting that the recent MBTA crisis reminds us that there is much is to be said for intellectual dishonesty. She would argue that part of the criminal neglect of the T is that we are much more likely to enjoy an adequate supply of the public goods and services that are so vital to the commonwealth’s welfare if we can convince ourselves that someone else is paying for them. Whenever the cost is coming out of our own pockets, we inevitably try to cut corners, do things on the cheap, and ultimately deprive ourselves of much that we really need.

One definition of intellectual dishonesty is ignoring reality when it interferes with what we want to believe about the way the world works. This is what government enterprises do when they pretend that operating and maintenance are not part of the true costs of providing a public service and are not truly accounted for in the price charged for a public good.

The public is as much to blame for this as elected officials who underestimate true project costs.  People’s expectation of receiving more services from government than they are willing to pay for leads to those officials to provide numbers that have all the accuracy of a Brian Williams anecdote. Taxpayers want more for less and elected officials lack the courage to tell them flatly there is no free lunch.

For example, when former Gov. Deval Patrick announced a nearly $1 billion federal grant to finance the MBTA’s $2 billion Green Line extension, little attention was paid to the fact that the commonwealth still has to foot another $1 billion in construction costs. Still further there is little if any discussion at all of how the project’s life cycle operating and maintenance costs will be covered.

People seem to have forgotten that public transit has to live in the real world and the biggest real-world concern these days is how to pay for it. In simple terms, this comes down to a choice between taxes or user fees – fares in the MBTA’s case.

The deterioration of the MBTA is testament to the consequences of deferring maintenance to disguise the true cost of providing the service. In the T’s case, maintenance has been deferred for decades.

The public is misled about the true life-cycle costs of public transportation assets. It is being economical with the truth to continue to believe you can pay for the overhaul of the MBTA or any other public provider of public transportation without either charging fares that reflect real life-cycle costs or increasing taxes to include operations and maintenance.

Hopefully, elected officials will finally catch the joke, end the intellectual dishonesty and truly embrace the hard work of cutting the MBTA’s financial and managerial Gordian Knots beyond the mere telling of words.

originally published: February 21, 2015

Bringing corporate earnings back into the U.S.

Posted on by j.giglio

A member of Congress was walking along one of St. Bart’s sandy beaches on holiday. Suddenly she stumbled on an old lamp that had washed up on the beach. She picked it up, rubbed it and, of course, a genie appeared.

The genie said, “I am the most powerful genie who has ever lived. I can do great and wonderful things, including granting you your dearest wish, but only one.”

This member of Congress was well attuned to international affairs, so she pulled out a map of the Middle East and said her dearest wish was a solution to the Israeli-Palestinian conflict.

The genie stroked his beard; looked around worried and said, “Oh dear that is a tough one. You should probably make another wish.”

The congresswoman was disappointed.but understood. “Alright,” she said, “I want you to rewrite the American tax code so everyone can understand it.

After a long silence, the genie said, “Let’s have another look at that map.”

With Republicans back in charge of Congress, corporate tax reform is on the agenda for 2015. Although it is hard to see how they can reduce corporate tax rates without also doing something for individual taxpayers.

If congressional leaders can cobble together a set of reform proposals, their next problem would be how to pay for them. Given the large federal debt, many policymakers believe corporate tax reform should be revenue neutral. To do that, any reduction in corporate tax revenue must be made up for by things like eliminating tax preferences, cutting spending programs, or adding to the deficit passed on to future generations.

Achieving broad tax reform is further complicated by political realities of 2016 presidential politics. Several senators are considering a run.

While the prospects for broad tax reform may be dim, one bright spot is a bipartisan proposal by Sens. Barbara Boxer, D-California, and Rand Paul, R-Kentucky, to bring back some of the estimated $2 trillion of foreign earnings that are now parked in foreign banks by reducing the corporate tax rate on profits earned abroad from 35 percent to 6.5 percent for the next five years.

Revenue from this short-term tax would be used to maintain the solvency of the Highway Trust Fund that is scheduled to run out of money in May unless Congress and the president do something.

In theory, repatriating the money would also increase investment in plant and equipment and new technology, thereby strengthening the economy and creating jobs at the same time it increases federal revenues.

There is no assurance that the repatriated corporate earnings wouldn’t instead be used for things like executive compensation, higher dividend payouts, and stock buybacks.

The president also waded in this week. Instead of a voluntary repatriation tax holiday, his $4 trillion 2016 budget proposal includes a one-time 14 percent tax on the $2 trillion of foreign earnings held overseas, with much of the proceeds going to fund infrastructure. There is no reason to believe that Republicans will embrace this proposal.

It doesn’t have to be this way if Congress and the administration had the minerals to fund the HTF by increasing the 18.4-cent per gallon federal fuel tax for the first time since 1993. If adjusted for inflation, the fuel tax would be 30 cents a gallon today.

Corporate taxes should be addressed in the context of broader tax reform. The American people are sick and tired of short-term fixes and lurching from crisis to crisis. They want a system that is simpler, eliminates unfair and inefficient loopholes, and levels the playing field for the middle class.

originally published: February 7, 2015

When fiction is too much fact

Posted on by j.giglio

You know what they say about birds of a feather. So I guess it was only natural that I would meet up with Nathan Feldman after the Federal Bureau of Prisons moved us from our respective minimum security prisons to a Manhattan halfway house. We both had several months left on the sentences they hung on us for securities fraud that swept our Wall Street careers down the drain.

I knew Nathan by reputation and recognized him in the halfway house because we had actually met once years ago at a Wall Street charity function for the homeless. So at the first opportunity, I walked up to him in the cafeteria with my right hand outstretched.

“Nathan,” I said.

“I think so. At least I was when I got up this morning.”

“Hi, I don’t know if you remember me, but I’m Tony Leonardo. And everything they say about me is true.”

“Oh yeah,” said Nathan. “I remember you. But only half the things they say about me are true. The question is which half?”

“I’m glad to see prison hasn’t dulled your well-known wit,” I said.

We sat across from each other at a cafeteria table. Nathan took several folded sheets of paper from his inside pocket and laid them out before me. One was a multi-colored chart showing the tremendous growth of the financial sector in the United States, with annotations handwritten here and there in red.

“Here, take a look at this,” he said.

The chart clearly showed that in the 1950s the finance and insurance industries accounted for about 3 percent of U.S. Gross Domestic Product. By 1970 it was up to 4.2 percent. But by 2012, even after the 2008 financial apocalypse, they represented 6.6 percent.

“That’s a great chart, Nathan,” I said. “Where did you get it?”

“Put it together myself,” he said “Here take a look at this other chart Tony.”

This one showed that the finance sector had grown disproportionately more profitable. In 1950, the financial sector claimed around 8 percent of U.S. corporate profits; now, it’s about 30 percent. It has displaced manufacturing as the biggest profit center in the economy. For sure, the money made from making things pales by comparison with the amount of money made from moving paper around.

You could also reasonably assume that just as profits shifted from labor-intensive businesses, such as manufacturing to the comparatively low-employment finance sector, wealth became concentrated in fewer hands, contributing big time to the huge rise of inequality that started in the mid-1970s.

“Actually, Tony,” Nathan said, “these figures understate how much finance dominates the economy because they don’t include the nonfinancial firms that have finance businesses. For example, GE Capital at one time generated over 40 percent of General Electric’s earnings.”

“Is it any wonder,” I said, “that our former industry gets favored treatment in Washington?”

“The rich are always listened to more than the poor and that’s especially true with how the finance sector dominates the economy, government, and society,” said Nathan. “Just think about the millions the industry spends on lobbyists and how many millions they donate to political campaigns.”

“And then there are all the senior government officials who have spent most of their careers in finance,” I said. “They have a mindset that is more closely attuned to Wall Street than Main Street.”

“For sure, just think about the number of Goldman Sachs and Citigroup people who navigate the revolving door, moving in and out of high government positions.”

“Well, time’s up, Nathan,” I said. “I have to go visit with the staff psychologist to take another one of these personality tests. All part of the prison bureau’s inmate rehab program, designed to help us return to society as decent citizens, whatever that means.” I laughed. “Let’s talk again soon.”

originally published: January 31, 2015

Tears for insider traders

Posted on by j.giglio

My name is Jay Robert Guy, III. I was one of the most successful hedge fund managers on Wall Street until I was sentenced to three years in federal prison on 10 counts of securities fraud, along with the usual seven-figure fines for engaging in insider trading.

The judge called me a white-collar sociopath, and that was one of the nicer things she said about me. My attorney objected and said it depended on how you define sociopath. The judge suggested, “A person who knows the difference between right and wrong but doesn’t care.”

Over-zealous prosecutors employed wiretaps, subpoenaed millions of documents, tried to flip former employees and used other heavy-handed methods to convict me of receiving material, non-public financial information from a network of highly paid independent experts my firm had retained. I was too busy to ever question them about the source of their research. How was I to know that the information was not public?

I paid a big chunk of the fines by selling our duplex on Manhattan’s Upper East Side, with its multi­ million dollar art collection. I also sold the obligatory house in the Hamptons with the barn I had converted into a spa for my wife, Muffy. It was the only way to get her out of Manhattan, along with the custom Porsche in the three-car garage. Poor Muffy felt martyred by the whole business.

Then there’s the Caribbean island hideaway. We actually spent just half a dozen weekends during the years we owned it. And various condos in Miami Beach, San Francisco and a couple of other cities where I did enough business to justify having my own pad.

I bought the 110-foot Feadship yacht from the previous owner’s estate when it was sitting in a Miami repair yard. It was halfway through a full hull and engine overhaul that had been suspended when the owner’s money ran out. I have written enough checks to complete the overhaul and get it back into the water, where it was moored at a dock in the repair yard while ‘the interior was being re-done.

Question: What is the definition of a yacht? Answer: A big hole in the water into which you keep pouring money.

And of course there was the Lear Jet based at Teterboro airport in Jersey with the full-time pilot ready to fly me anywhere on a moment’s notice.

You get the idea. I lived a life too rarified for the average working stiff to even imagine. All the usual grown-up toys Wall Street money mavens tend to accumulate more or less automatically when the big dollars are rolling in.

I paid the rest of the penalties by liquidating most of my domestic investment accounts. So in a short period of time, I went from being ridiculously rich to merely “financially independent.” According to an article by some smart-aleck college professor, that is supposed to be the worst punishment society can inflict on a white-collar felon.

At least my numbered and password-protected offshore accounts are still intact. They will enable me to set up shop again once my high-priced attorneys get the court to vacate my original conviction.

Why am I so confident? Because of a decision by the 2nd U.S. Circuit Court of Appeals in New York that overturned the conviction of two hedge fund managers because prosecutors had not proved that the defendants knew the original source of the inside information and whether the source benefited from sharing the information. Thank God the court finally realized that these reckless trading prosecutions have gone too far. They hurt real people like Muffy and me.

We are in the process of making the same argument on appeal. After that it will be time to get back to business as usual. Actually, it should be even better now that insider trading has gotten a whole lot harder to prove.

originally published: January 24, 2015

The Rothschild legend’s legacy on insider trading

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The convictions of two former hedge fund managers on insider trading charges were unanimously dismissed last month by the three-judge panel of the influential Second Circuit U.S. Court of Appeals. The ruling makes the charge tougher to prove, and illustrates why Congress needs to provide a clear definition of insider trading.

The court held that two Wall Street traders could not be convicted of insider trading by merely possessing and trading on privileged information leaked by corporate insiders and passed along to them through several levels of intermediaries. Instead, it found that the traders must have known the source of the inside information and that the person who provided material, nonpublic information must personally benefit from the leak.

This tougher standard puts pressure on the Securities and Exchange Commission (SEC) to better define what actually constitutes insider trading. Both the SEC and the Department of Justice prefer a broad rule against insider trading because they believe that it seriously erodes the public’s confidence in financial and capital markets, thereby reducing liquidity and investment.

The Second Circuit ruling marks a significant setback to U.S. Attorney for the Southern District of New York Preet Bharara, whose office patrols Wall Street. Until now, Bhahara had a near-perfect track record, gaining convictions or guilty pleas from about 90 people for insider trading since he became U.S. attorney in 2009.

SEC chairwoman Mary Jo White predictably complained that the ruling was “overly narrow.” Bharara said he fears it “interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information.” A key objective of the aggressive prosecutions was to leverage the ambiguity of what constitutes insider trading to deter illegal behavior, especially on Wall Street.

In the United States, insider trading is one of the most common offenses that usually falls under the general purview of securities fraud. Most insider trading cases are covered by Rule 1Ob-5 of the Securities Act of 1934, which prohibits fraudulent or manipulative conduct in connection with the purchase or sale of securities. While it is regarded as a serious crime, no statute specifically defines it.

The ultimate insider trade was when Nathan Rothschild learned that Napoleon had been defeated at the Battle of Waterloo in 1815 a full day before anyone else, allegedly thanks to carrier pigeons that made their way across the English Channel to London. This advance knowledge enabled him to make a killing by buying up the British bond market before the news of the British victory was more widely known.

The Rothschild legend identifies the value of inside information when it is applied to securities trading. For years, judges, prosecutors and the SEC have worked to expand what constitutes insider trading, yet there is little agreement as to exactly when trading on material nonpublic information should be prohibited. This lack of clear guidance on the parameters of the prohibition creates immense difficulties for prosecutors.

So an ever-changing cast of prosecutors, judges and SEC officials have interpreted the general law against “securities fraud” differently as it applies to insider trading, struggling to measure what conduct constitutes improper trading on material non-public information with the precision of a crystal meth cook.

Since insider trading is a crime punishable by harsh penalties, Congress needs to define it, perhaps by prohibiting any trading on material nonpublic information. It should be made clear that those possessing inside information must either make it public or forego trading. The Second Circuit’s recent ruling makes it clear that such an approach would be preferable to the current murky, fuzzy rules.

Until Congress unambiguously defines insider trading, we will continue to rely on the ability of present­ day Solomons to make the most delicate of judgments about what constitutes improper trading on material nonpublic information. 

originally published: January 10, 2015

Congress must open its eyes to carried interest

Posted on by j.giglio

When the 114th Congress convenes on Jan. 15 with a Republican majority in both houses,
comprehensive tax reform will be high on their to-do list. Among the first things they should address is ending the practice of treating so-called carried interest as ordinary income.

For those of you who did not grow up passing around copies of the tax code, there are few subjects more esoteric than America’s byzantine tax code. The federal tax code consists of nearly 74,000 pages and about four million words, twice the length of the King James Bible and the entire works of Shakespeare combined.

This voluminous magnum opus validates the average American’s suspicions that Washington is a stage of prancing marionettes tweaked by Wall Street (aka Crime Central) and other moneyed interests.

Rewriting the tax code is a difficult undertaking given the multitude of well-capitalized special interest groups from every comer of American business and society that have skin in the game when it comes to tax policy. Closing tax loopholes that favor particular groups instigates knock-down drag-out political fights. This is why the last serious tax reform came in 1986, also known as light years ago, under President Reagan.

One place to start comprehensive tax reform is to bring an end to the carried interest loophole, which allows super wealthy investment managers, including those in the private equity, hedge fund and venture capital business, to define their compensation as capital gains and pay income tax at a far lower rate. This forces ordinary people to pay more by transferring the burden to those who cannot afford tax attorneys.

Investment managers take a considerable portion of their pay as carried interest, which means being compensated for managing funds’ investments as a share of fund profits, without putting their own capital at risk. Under current tax law, carried interest is treated as a capital gain, subject to the top 20 percent capital gain rate plus a 3.8 percent surcharge on unearned income to help pay for the Affordable Care Act, rather than as ordinary income subject to the top marginal tax rate of 39.6 percent.

As former Treasury Secretary Robert E. Rubin noted several years ago, “I think what they’re doing is getting paid a fee for running other people’s money.” Put differently, carried interest is performance­ based compensation for investment management services rather than a return on financial capital invested by managers.

The one-percenters, who tend to be big political donors, are the principal beneficiaries of carried interest. Quite apart from basic fairness, treating all taxpayers who provide a service the same, the Obama administration has estimated that ending this tax loophole would generate an additional $15 billion in revenue over 10 years.

For a long time, this loophole has unfairly enabled some of the highest paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all. Legislation is needed to fix the carried interest dodge and ensure that income earned managing other people’s money is taxed at the same rates as that earned by teachers, factory workers, attorneys and millions of other Americans for the services they provide.

Because of the financial sector’s outsized influence, you can expect to hear how closing the carried interest loophole will destroy capitalism as we know it and undermine the economy. Experience teaches us that the financial sector’s lobbying clout, combined with the fact that doing the right thing is a dangerous luxury for politicians, Main Street standing on the sidelines is not a recipe for success on this issue.

The American public has to actively engage and abandon the assumption that so many things are now taken for granted that it’s as if the public literally no longer sees them.

originally published: December 27, 2014

Congress must open its eyes to carried interest

Posted on by j.giglio

When the 114th Congress convenes on Jan. 15 with a Republican majority in both houses,
comprehensive tax reform will be high on their to-do list. Among the first things they should address is ending the practice of treating so-called carried interest as ordinary income.

For those of you who did not grow up passing around copies of the tax code, there are few subjects more esoteric than America’s byzantine tax code. The federal tax code consists of nearly 74,000 pages and about four million words, twice the length of the King James Bible and the entire works of Shakespeare combined.

This voluminous magnum opus validates the average American’s suspicions that Washington is a stage of prancing marionettes tweaked by Wall Street (aka Crime Central) and other moneyed interests.

Rewriting the tax code is a difficult undertaking given the multitude of well-capitalized special interest groups from every comer of American business and society that have skin in the game when it comes to tax policy. Closing tax loopholes that favor particular groups instigates knock-down drag-out political fights. This is why the last serious tax reform came in 1986, also known as light years ago, under President Reagan.

One place to start comprehensive tax reform is to bring an end to the carried interest loophole, which allows super wealthy investment managers, including those in the private equity, hedge fund and venture capital business, to define their compensation as capital gains and pay income tax at a far lower rate. This forces ordinary people to pay more by transferring the burden to those who cannot afford tax attorneys.

Investment managers take a considerable portion of their pay as carried interest, which means being compensated for managing funds’ investments as a share of fund profits, without putting their own capital at risk. Under current tax law, carried interest is treated as a capital gain, subject to the top 20 percent capital gain rate plus a 3.8 percent surcharge on unearned income to help pay for the Affordable Care Act, rather than as ordinary income subject to the top marginal tax rate of 39.6 percent.

As former Treasury Secretary Robert E. Rubin noted several years ago, “I think what they’re doing is getting paid a fee for running other people’s money.” Put differently, carried interest is performance­ based compensation for investment management services rather than a return on financial capital invested by managers.

The one-percenters, who tend to be big political donors, are the principal beneficiaries of carried interest. Quite apart from basic fairness, treating all taxpayers who provide a service the same, the Obama administration has estimated that ending this tax loophole would generate an additional $15 billion in revenue over 10 years.

For a long time, this loophole has unfairly enabled some of the highest paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all. Legislation is needed to fix the carried interest dodge and ensure that income earned managing other people’s money is taxed at the same rates as that earned by teachers, factory workers, attorneys and millions of other Americans for the services they provide.

Because of the financial sector’s outsized influence, you can expect to hear how closing the carried interest loophole will destroy capitalism as we know it and undermine the economy. Experience teaches us that the financial sector’s lobbying clout, combined with the fact that doing the right thing is a dangerous luxury for politicians, Main Street standing on the sidelines is not a recipe for success on this issue.

The American public has to actively engage and abandon the assumption that so many things are now taken for granted that it’s as if the public literally no longer sees them.

originally published: December 27, 2014