Another gem  from Kevin Williamson at National Review, Bad Medicine on ‘Carried Interest’

Nobody in Washington wants to face that particular angry mob of IRA investors with torches and pitchforks. What we are talking about is singling out a particular class of businessmen for punitive tax treatment because we resent how much money some of them make, and because what they do seems like voodoo to people who do not understand it.

As a matter of policy, changing the tax treatment of private-equity income would not raise a great deal of tax revenue relative to federal spending and liabilities, and it probably would not have as much of a flattening effect as our class warriors hope. For one thing, if we convert those investment managers’ income to salaries and bonuses, then the firms that employ them are going to deduct those salaries and bonuses as ordinary business expenses, which they would be entitled to do. For another, investors will respond to economic incentives. The people who run these kinds of businesses are pretty clever about moving money around. The gentlemen in Congress are not going to outsmart them.

The broader discussion about taxes and fairness and — odious phrase — “social justice” is a waste of time. Taxes are not an instrument of justice: They are an instrument of revenue. The federal government requires x dollars to do the things we demand of it, and the only end of tax policy should be raising those dollars in a way that causes as little economic disruption as possible and invades our privacy as little as possible. At the moment, our model is lots of disruption and maximal invasion of privacy — and all of it handled by the incompetent, corrupt, politicized agents of the Internal Revenue Service.

Those are the tax-code problems we should be addressing. Instead, we are addressing some unhappy Americans’ envy and resentment. That isn’t tax policy — it’s psychotherapy.

HKO

I confess to falling for the appeal of the ‘carried interest’ loophole canard. Given the lower rate, a businessman or investor will certainly overweight capital gains over earned income if he has the opportunity.  The lower rate is reflective of the risk.  Warren Buffet only draws a salary of $150,000. That is not how he became one of the wealthiest men in America.

Like so many solutions to unfairness and social justice, the cure stands a good chance of being worse than the disease.  Hillary complained about the short term thinking of American business. Her solution was a six tiered capital gains system that was the worse part of her awful economic plan. The greatest harm in short term thinking is from legislators who voice another change in tax policy whenever they walk past a microphone. The ink is still wet on the last tax increase when hear a new speech of how the the rich are not paying their fair share.  Who would invest in such a environment?

The economy and financial community is a very dynamic system and constantly adjusts to conditions much faster than any social justice legislator can match. Caps on executive pay led to stock options that made executives richer.  The Sarbanes Oxley Act passed in the shadows of the Enron scandal discouraged companies from going public and created opportunities for private equity, that now the ‘carried interest’ demonizers wish to address.

Regulators are often tasked to solve a problem created by the last round of regulations.  New sources of wealth and unfairness are often generated by the previous attempt to equalize them in a previous form.

Great kudos for Kevin for shedding light on this ruse in a way that few other media sources even attempt.

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