Tax Breaks Extended For Special Interests

Hedge fund and private equity managers came out of the "fiscal cliff" agreement with a better tax setup than many affluent taxpayers. It largely keeps in place a practice that allows them to have their earnings taxed at a capital gains rate rather than at a higher rate for ordinary income.

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RENEE MONTAGNE, HOST:

It's MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep. Last week's fiscal cliff deal not only raised payroll taxes for working Americans and hiked the income tax for the top 2 percent, it also extended tax breaks and preferences for a wide range of industries and special interests. We've been hearing about this for days, and NPR's Steve Henn has even more.

STEVE HENN, BYLINE: Generally, the phrase "special interest tax break" is a dirty one in Washington; as are its close cousins, the tax loophole or tax extender. But after the fiscal cliff deal was signed into law last week, President Obama was eager to trumpet some of the special tax breaks the deal preserved.

PRESIDENT BARACK OBAMA: We extended tax credits for families with children, and tuition tax credits that are helping millions of families pay for college.

HENN: The president also boasted about tax credits for clean energy. But the deal included some tax benefits the president didn't brag about - like this one.

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UNIDENTIFIED ANNOUNCER #1: Captain Morgan - to life, love and loot.

HENN: There is a close to half-billion-dollar tax benefit aimed at rum producers based in Puerto Rico and the U.S. Virgin Islands.

(SOUNDBITE OF NASCAR BROADCAST)

UNIDENTIFIED ANNOUNCER #2: Ryan Newman makes it four-wide back in the pack.

HENN: There are tens of millions of dollars for NASCAR racetrack owners, and hundreds of millions in special tax deductions for films shot in the U.S.

(SOUNDBITE OF SONG, "HURRAY FOR HOLLYWOOD")

UNIDENTIFIED SINGER: Hurray for Hollywood...

VICTOR FLEISCHER: You know, it's a funny thing to look at because it's pitched as a bill that raises taxes. But then tucked into it are all the tax extenders.

HENN: Victor Fleischer is a law professor and tax expert at the University of Colorado. He says that these special tax breaks are worth tens of billions.

FLEISCHER: Which, from a tax policy perspective as an academic, very few of those make any sense at all. I mean, this is exactly the wrong direction in terms of tax reform.

HENN: For years now, Fleischer has been one of the most outspoken critics in the country of a tax treatment known to accountants as carried interest. Fleischer calls it a loophole. It allows money managers at hedge funds, private equity firms and venture capitalists to avoid paying income tax on some of their earnings. Instead, some of the fees they charge their clients are treated as capital gains, and taxed at a much lower rate.

FLEISCHER: Even though the fund manager is getting this payment in exchange for services that they provide - it's labor income, it's not investment income for the fund manager - it's nonetheless taxed at the lower, long-term capital gains rate.

HENN: That rate is now going up from 15 to 20 percent, but it's still roughly half the 40 percent they'd have to pay if the money were treated as ordinary income. Collectively, this tax break is worth billions each year to some of the wealthiest people in America. Carried interest even became an issue in the presidential campaign.

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OBAMA: I'm Barack Obama, and I approved this message.

UNIDENTIFIED ANNOUNCER #3: Tax havens, off-shore accounts, carried interest - Mitt Romney has used every trick in the book. [POST-BROADCAST CORRECTION: Politifact.com reviewed this Obama re-election campaign ad, and found the assertion that carried interest is a "trick" to be "mostly false."]

HENN: Yet despite that, the carried interest deduction survived the fiscal showdown last week and emerged almost unscathed.

FLEISCHER: The issue keeps coming up, but the various lobbying groups have been effective in maintaining the status quo.

HENN: According to the Center for Responsive Politics, executives at hedge funds, private equity firms and venture capital companies gave more than $100 million to political candidates and outside groups from both parties, during the last election. And these industries spent more than $40 million on lobbying, in the past two years.

Mark Heesen lobbies for the National Venture Capital Association. He's been arguing for years that using the tax code to encourage venture capitalists to take risks, and try to build new companies, makes sense.

MARK HEESEN: If you are looking at any place that is creating jobs, it's in the emerging growth company sector, and that's exactly where the venture capitalists play.

HENN: For now, at least, that argument has carried the day, but both sides agree this fight isn't over. The debate about carried interest is likely to return to the capital in the next few months, as Washington continues to search for ways to get the deficit under control.

Steve Henn, NPR News, Silicon Valley.

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Correction Jan. 9, 2013

Politifact.com reviewed the Obama re-election campaign ad excerpted in this story and found the assertion that carried interest is a "trick" to be "mostly false."

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