The Washington Post reported yesterday that Senate Majority Leader Harry Reid told private equity funds that they need not worry about Congress taking away their special tax breaks this year. Just to remind folks, the equity and hedge funds benefit from two special tax breaks. Some funds operate as partnerships that have all the privileges of corporate status, including being publicly traded on stock exchanges, but don't pay any corporate income tax. In addition, fund managers, some of whom are paid hundreds of millions of dollars a year, only pay taxes at the low 15 percent capital gains rate, instead of the 35 percent rate that other high income workers pay. The Congressional Budget Office estimated that these two tax breaks together may cost the government as much as $6 billion a year in lost revenue, almost enough to pay for the S-CHIP expansion now being pushed by Congress. The fact that incredibly rich fund managers are paying lower tax rates than school teachers and firefighters naturally enraged many people across the country. This prompted efforts by the Democrats to repeal the special tax breaks for the industry. The Post article effectively means that the battle is over, the Democratic leadership has surrendered. But, it also seems that they got something for their efforts. The article reports that private equity firms spent $5.5 million on lobbying to preserve their tax breaks, four times as much as they spent last year. While some of this money was kept by the middlemen, much of it was passed along as campaign contributions to members of Congress. In other words, the net effect of the effort to eliminate tax breaks for hedge funds and private equity funds was to raise millions of dollars for members of Congress, with a disproportionate share undoubtedly going to Democrats in leadership positions. So those who worked to eliminate tax breaks that went to the richest people in the country ended up securing campaign contributions from these people for members of Congress. Maybe the Democrats will at least arrange to give these activists some recognition (e.g. Texas Pioneers or Rangers) for their fundraising. --Dean Baker
