New York: Patriotic Millionaires group wants to close the carried interest loophole

Last fall, the carried interest tax deduction was in the news because many presidential candidates decried it as an unfair windfall for the rich. PBS News Hour explained it simply as “a money manager’s share of the profits made by investing clients’ money — typically, around 20 percent.” When investments are held for more than a year, the profits they generate are taxed at the 20 percent rate for long term capital gains, not the 40 percent rate applied to earned income.

In a statement made to PBS, Morris Pearl, the head of the group Patriotic Millionaires, supports closing the deduction on the grounds that “wealthy people, who simply collect income from their investments, pay tax at a much lower rate than people who actually work for a living. The wealthy should pay tax at a higher rate than the working class people, not a lower rate.”

On the other hand, Forbes described it as a fair benefit for investors and investment managers that helps them avoid large investment expense itemized deductions that generate few tax deductions.

Patriotic Millionaires has taken its fight to repeal the carried interest tax break to the New York state legislature. Patriotic Millionaires describes itself as “a group of more than 200 Americans with annual incomes over $1 million and/or assets of more than $5 million who believe that the country’s current level of economic inequality is both dangerous and immoral.”

By way of public education, they support legislative efforts that create the following:

• A fairer tax system that includes greater tax obligations for millionaires and major corporations who have benefitted the most from the nation’s resources;
• Higher incomes, beginning with a minimum wage of at least $15 an hour, for wage earners, who are the foundation of our nation’s economy; and
• Less political influence for those whose sole credential is the ability to pay for it.

Last week in Albany, as part of their state-by-state campaign, the Patriotic Millionaires highlighted new legislation, A09549, introduced by New York State Assemblymen Jeffrion L. Aubry and Sean Ryan, that is designed to close what the Patriotic Millionaires described on their website as an “outdated, unjust, and corrupt tax loophole that allows Wall Street fund managers to pay a lower tax rate than regular New Yorkers.”

A09549 is essentially about the re-characterization of income. The New York Times summarized it as a law that would “raise taxes on state residents who benefit from the lower rate, to precisely offset the tax savings they receive at the federal level.” Anticipating that some would move to a nearby state to avoid the tax increase, the assemblymen included a provision that conditions the tax increase on the passage of legislation that has an “identical effect” in Connecticut, New Jersey, and Massachusetts.

The New Yorker characterizes the carried interest tax loophole as the “tax break [that] has helped private equity become one of the most lucrative sectors of the financial industry.” The Patriotic Millionaires estimate, conservatively, that tax receipts from closing the loophole in the Empire State would reach $3.7 billion. According to The New Yorker, supporters of closing this loophole hope to see this extra revenue used for public investments in areas like schools and economic development.