Bush and Trump’s “Populist” Tax Rhetoric Is All Talk

Presidential candidate Donald Trump made headlines last week for saying that hedge fund managers are “getting away with murder” in their tax-avoidance behavior. He said he would put a stop to this by closing the infamous carried interest tax loophole, leading to a rush of articles declaring that Trump is threatening to “blow up” the Republican Party’s orthodox support of tax cuts for the rich. This week, former Florida governor Jeb Bush followed suit in calling for the closure of the loophole and received similar accolades for challenging the “long-held tenets of conservative tax policy.”

But the populist rhetoric of both Trump and Bush around carried interest should not distract from their broader plans to dramatically cut taxes for wealthy investors in other ways. Their campaign rhetoric does not deserve accolades; it requires greater scrutiny.

Hedge fund and private equity managers usually structure investment deals in such a way that they receive a percent of an investment’s profits as compensation–carried interest–even if they do not invest their own capital. A loophole in our tax laws allows investment managers to claim this income as capital gains rather than normal income, allowing money managers to pay the special lower tax rate for investment income.

For the last decade, Democrats have called for Congress to close this loophole. Populist Sen. Elizabeth Warren has often railed against it. Democratic presidential candidate Bernie Sanders recently said the Treasury Department has the authority to close this loophole. And President Barack Obama, along with current presidential contenders Hillary Clinton, Bernie Sanders and Martin O’Malley, all have proposed closing the carried interest loophole.

Mostly, calling for closing the egregious carried interest loophole has been the purview of Democrats, although former Ways and Means Chairman Dave Camp proposed closing the loophole as part of his broad tax reform plan last year. So, it is to be expected that some would call Trump and Bush’s plans to close the loophole a “populist” policy position. But they also both propose to pile tax cuts on the rich many times larger than the roughly $2 billion a year that could be raised by taxing carried interest at the same rate as normal compensation.

Bush’s plan includes several substantial tax cuts that would directly benefit wealthy investors. To start, it would cut the already low preferential tax rate on capital gains from 23.8 percent to 20 percent, giving wealthy investors an annual tax cut of $30 billion (a break 15 times the size of the carried interest loophole). In addition, Bush is proposing to give corporations hundreds of billions of dollars in new tax breaks over the next decade.

As for Trump, if his soon-to-be-released tax plan resembles his most recent tax reform proposal, anti-tax conservatives and wealthy investors won’t have anything to fear after all. In his 2011 tax reform proposal, Trump proposed to eliminate the corporate income tax and the estate tax, drop the tax rate on capital gains income and cut marginal income tax rates. This  would result in huge tax cuts for the wealthy. The roughly $500 billion annual cost of eliminating the corporate income tax would pay back wealthy investors 250 times over for the tax hike they’d see from closing the carried interest loophole.

Residual public disdain for Wall Street due to the financial crisis makes it politically expedient to bash wealthy money managers. But the tax agendas outlined by Trump and Bush would lavish huge tax breaks on the very same wealthy investors they claim to be taking on.