Blue Mass Group

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NYT: Kerry protects loophole for wealthiest

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Well-informed BMG folks: is this claim in a 6/14 New York Times editorial as bad as it sounds?

You heard right. Desperately needed unemployment benefits have been held hostage to a tax break for the rich, and the Senate’s Democratic leadership has had to delay and finagle to get its own caucus in line.

Many private equity mavens, venture capitalists and other partnerships have lobbied to keep as much of the loophole as they can. Most Republicans and some Democratic senators – including John Kerry of Massachusetts, Mark Warner of Virginia and Maria Cantwell of Washington – are doing their bidding.

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  1. Nonemergency provisions in the bill do need to be paid for, including renewal of several generally useful business tax breaks, like the research-and-development tax credit, totaling $32 billion over 10 years. To help cover those costs, Democratic lawmakers in the House and Senate started out with the sound idea to close an egregious tax loophole that allows wealthy fund managers at private equity firms and other investment partnerships to pay a top tax rate of just 15 percent on much of their earnings – versus a top rate of 35 percent for all other higher-income Americans.

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    p>This loophole needs to go away yesterday…

    <

    p>but the New York Times has a history of publishing stories that impugn Democrats without any good backup.  (By this I mean Jeff Gerth’s shoddy reporting on Whitewater, Kit Seelye & Maureen Dowd & Frank Rich’s made-up stories about Gore, and the recent stuff about Blumenthal in CT.)  So, it might be fair to ask John Kerry’s office whether he supports charging the fund managers 35% on their multimillion finances instead of the 15% that a pizza delivery guy might pay on his wages.

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    p>But let’s remember that the NYT can’t be trusted when it makes accusations against Democrats.

  2. Every member of BMG should call Kerry’s office on this – I know I will.

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    p>If true – and since it’s the NY Times so it probably is, but let’s double check – then it’s deeply disturbing.

    • I should have wrote “I think this should be on BMG’s front page” rather than “why isn’t this…”.  No reason to believe that the moderators had already decided to not promote this.

  3. So Kerry’s office wasn’t answering, but its here in the Daily Kos from May 20th

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    p>http://www.dailykos.com/story/…

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    p>This does not belong in an emergency unemployment extension bill. Trying to include it smacks of using an important bill to pass something that benefits a smaller, in this case extremely wealthy, group without substantial debate and a stand-alone bill that Senator’s would have to answer to during their re-election campaigns.  I realize this maneuver is used frequently, but now is not the time to be using the financial plight of the unemployed to pass something that maintains this loophole that should have been closed long ago.

    <

    p>Kerry should be ashamed of taking this position and his office needs to be besieged with calls, letters and emails to let him know where his constituents stand.

    • With all the hoopla about the 2004 election, would it have made any difference who was elected?  Are both Democrats and Republicans ordained to follow the orders of a ruling class?

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      p>Have Democrats ceased being Democrats and now only selling their votes to the highest bidders?  Lapdogs looking for a treat?

      <

      p>“Anything important is never left to the vote of the people. We only get to vote on some man; we never get to vote on what he is to do.”  –Will Rogers  

        1.  Balancing the sticking up for the common man with obtaining enough political donations to live to fight another term.

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        p>2.  Balancing populism with the addition/expansion of jobs in their own district.  For Kerry that means financial jobs, despite tax unfairness.  For Landreau and Byrd, that means proteecting the oil industry, despite environmental catastrophe.

        <

        p>

        <

        p>Until voters figure out how to shift the ‘market forces’ of elections in Democratic primaries to both (a) get more populist/progressive/whatev politicians past the D primary, and (b) get those politicians elected in the general, Democratic politicians are going to tack against strong “Big D” principles from time to time, particularly when there’s an unnaturally large advantage to their district, due to natural resources, culture, high density of a particular kind of job, etc.

        <

        p>The key is to get enough Democrats elected so that you can lose a few for each vote and still get the numbers you need to pass the bill.  Then the local politico can grandstand and vote in what seems to be his or her district’s best interests, and the Democratic caucus can overrule and behave like Democrats as a group.

        <

        p>This is yet another reason why getting blue dogs elected is better than Republicans.  They can provide D votes in some cases when a more liberal Dem votes against Dem philosophies due to some local interest.

          • since the Senate seems to attract self-funded gajillionaires more frequently.  Not terribly frequently to be sure, but it happens frequently enough that any Senator wants to make sure he’s got enough funds to fight off a self-funder if at all possible.  In this particular case, I think (2) weighed heavily on him.

        • …of mirroring the GOP and making people afraid of our extremes, both the public at large and candidates seeking to get through primaries.

          • Why?

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            p>Pelosi, Reid, Frank, Daschle, Clinton, Clinton, Carter, Kennedy, Massachusetts, Chicago, San Francisco.  The GOP always demonizes the strengths of the Democratic party, and they always will.  Notice how Kucinich isn’t in that list?  Bernie Sanders?  The GOP doesn’t demonize the most liberal Democrats; it demonizes the most powerful Democrats.

            <

            p>

            <

            p>The Democrats don’t do this.  Sure, we went after GWB, but he earned that.  We tend not to go after Reagan nor GHWB.  We went after DeLay, but we don’t go after Boehner, Cantor, nor McConnell.  We certainly don’t demonize Southerners nor big-square-staters nor the citizens of Dallas or San Diego the way the GOP loves to make Democratic geographic strongholds pejoratives.  Democrats go after the extremists, not leadership per se.

            • … but this was the comment of the day for me yesterday. Maybe I’m thick, but this never occurred to me. The only folks I ever hear going after Boehner, Cantor, or McConnell on a regular basis are the crew on the Stephanie Miller show.

  4. because they either need the donations from big corporations or because these hand-outs to the industries sustain jobs.  Neither is true.

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    p>Nothing will change as long as we keep making excuses.

  5. John Kerry is supporting the carried interest tax incentive for the venture capital sector here in the Commonwelath because it is good for the Massachusetts economy.

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    p>The annualized dollar amount and number of IPOs generated in a given state is an accepted metric for measuring the relative economic competitiveness of a state.  The carried interest tax break available to VCs and hedge fund principals is an incentive for the formation of new investment capital via these forms of private equity.  

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    p>A healthy venture capital sector in Massachusetts equals jobs for Massachusetts.  Remember jobs, those societal good things that we Democrats believe in creating?

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    p>Do you like the fact that our Governor can, rightfully so, point to the fact Massachusetts is today producing far more private sector jobs than many states with far larger populations?  You can in large measure thank the relatively robust (relative to even Silicon Valley today) venture capital sector in the Commonwealth for that good news.

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    p>Did you like reading that national business story of last week that IBM will be opening its largest single software development lab in Massachusetts (Littleton – Westford), a story also rightfully pointed to by our Governor?  Did you catch the line in the IBM story to the effect that the new software development lab will be located here so that its developers can access “more than 100 Venture Capital backed small technology companies in Massachusetts.”  

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    p>Do you like that Kendall Square hosts the greatest single concentration of employment and investment in biotechnology on the planet, bar none?  Do you think that is possible without the Massachusetts VC sector?

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    p>Repeat: John Kerry is supporting the carried interest tax incentive for private equity because it is good for the Massachusetts economy.

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    p>Unless VCs can expect to get money out of deals, they won’t put money in.  Carried interest allows them to put greater monies at risk, all other things being equal.  More VC investment in states like ours with a healthy VC ecosytem means we move out of recession faster.  Get it?

    <

    p>We are Massachusetts Democrats.  Let’s try to understand how we produce jobs in our high technology economy.  Let’s try to stop the adolescent whining about ‘tax breaks for the rich.’  
       

    • It seems to me that job growth is coming from at least six different areas:

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      p>1.  Retail/Large companies.  VC likely has little to do with Target hiring folks at this point.
      2.  Super-small businesses.  I doubt that the mom&pop diner or individual boutique clothing store got VC funds.
      3.  Non-profits.  The hospitals, universities, and other non-profits.  Any VC money there?
      4.  Census.  No VC.
      5.  Stimulus.  Again, no VC.
      6.  Big idea, new company: VC.

      <

      p>Now, I have no idea how many jobs are coming from each of these areas, but I have a hard time believing that VC, a relatively new growth technique within the economy, is responsible for a significant portion of the job growth in MA within the past 6-18 months.

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      p>Got data to the contrary?
      P.S. What do you do for a living?  I poked around at Prattnetworks, and can understand why you’ve got such a VC-centric viewpoint; it appears awfully good for your own company’s bottom line.

      • … but there you have it…

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        p>

        1.  Retail/Large companies.  VC likely has little to do with Target hiring folks at this point.

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        p>Target is a 60+ year old, well established company… Staples is a 25 year old company.  

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        p>Staples was a VC funded company.  VCs helped it go from one store, in Brighton Ma, to being the largest office supply chain in the world.  In addition to that, retail has met the internets… And whether it’s payments (paypal, viaweb, now Yahoo! Store) or actual retail (kayak.com, Ruelala, zappos.com, etc…) you can bet VCs have  a hand in  internet retail.  And a lot of software companies are working overtime, VC funded, to crack some of the nuts of internet retail: better payment systems, security and encryption, datacenter scaling…

        <

        p>

        2.  Super-small businesses.  I doubt that the mom&pop diner or individual boutique clothing store got VC funds.

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        p>I don’t know from mom&pop, but I do know that, at one point, Facebook, Netflix, and Google were ‘super small businesses”:  each comprised of three people. ( Chris Hughes, one of the co-founders of Facebook, works as ‘entrepeneur in residence’ at General Catalyst, a Boston based VC now…)  It’s ridiculously easy to take a good, web-centric idea to production with a staff that could be construed as ‘super-small business‘… so you really can’t exclude VCs on the basis of size.

        <

        p>

        3.  Non-profits.  The hospitals, universities, and other non-profits.  Any VC money there?

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        p>Well, yes.  There’s not enough space to list just the MIT inspired spin-offs alone. Then there’s Harvard and Tufts and others.  Yale, being in the hinterlands, has the choice of going to NY or Boston…  UVM grads often gravitate towards Boston as well.

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        p>As for hospitals, having some of the leading medical schools and hospitals, means that pharmaceuticals, medical device manufacture and medical record keeping software companies flourish.  Not all of them are VC funding, but certainly the majority…

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        p>One might posit, in fact, that world class universities, hospitals, etc, are the main gravitational attraction for VCs.  Quite the eco-system as evolved precisely and exactly because of the great institutions here.  The same is true for California’s silicon valley.

        <

        p>

        Now, I have no idea how many jobs are coming from each of these areas, but I have a hard time believing that VC, a relatively new growth technique within the economy, is responsible for a significant portion of the job growth in MA within the past 6-18 months.

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        p>Zipcar is a Boston based company that has existed off of VC money for much of its existence (aggressive growth and acquisition strategy have eroded any profits to date…).  It has filed for an IPO just this month and hopes to start standing on it’s own within a year or so.  VC’s could have pulled the plug on it years ago… But, similar to Amazon, a decision to run deficits while chomping up market share has kept jobs from being lost, if not actually gained.  This is not, actually, unusual. A lot of VCs are carrying companies that they hope will someday be ludicrously valued but have, as yet, to show dollar one in profit.  That represents a lot of people who, otherwise, would be unemployed.   An accelerating economy means that these companies can move from holding their breath to more aggressive growth strategies.

        <

        p>It’s true that VC is a relatively new, and increasing, slice of the economy (past 30 years or so…) but that’s due in no small part to retrenchment in defense department spending in that same time period.  Companies like Millipore, Raytheon, Analog Devices and BBN Technologies (which is now owned by a VC…) were once some of the biggest employers in the state and were heavily dependent upon defense capital for much of their early existence.   Military efforts at COTS integration, bad press surrounding military contracts/spending and a clear eyed view of market forces led these companies to diversify away from defense capital (though, to be sure, not wholly away…)

        <

        p>A 10,000 foot view of the Massachusetts economy shows a great deal of diversity: industrial, technology, pharma/bio-tech (and life sciences), retail and financial.  Not one of these sectors is untouched by VC involvement…  

      • Maybe we should target tax breaks to the Dept of Commerce.

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        p>Venture capital is an industry with a significant presence in Massachusetts because of the proximity of a lot of universities, the graduates and students of which start up a lot of new companies.  I suppose it is a “relatively new” way to finance the growth of a business, compared with, say, banking, which is hundreds, arguably thousands of years old, but has been established here for decades.

        <

        p>IS the existing policy fair, or the right one?  I don’t know, but I do know that the boundary between “income” and “capital gain” in that context is fuzzy at best.

        <

        p>In any event, Kerry’s job isn’t to support measures that are fair, but harmful to Massachusetts.  Kerry’s job is to do things that are good for them what elected him.

        <

        p>Sheesh, you have me defending Senator Do You Know Who I Am.

    • You state quite strongly that the VCs will not put money into deals unless they expect to get money out.

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      p>Let’s see about the money:

      <

      p>1) The largest bulk of most VC money comes from investors in their funds and not the VC managers themselves.  The VC managers earn a management fee plus a percentage (usually 20%) of profits from the sale of investment in the companies. So what your really saying here is that the VCs will not invest their investors money in a company unless they can expect to get money back for themselves.  But let’s be clear, most of the money invested money is not theirs, but the money we are talking about taxing is their “bonus” for doing a good job.

      <

      p>2) The money earned by others managing money in a more traditional money managers, e.g. a mutual fund manager, is based on salary plus bonus.  Both of these are taxed at ordinary income regardless of what the bonus is based on.  Are you arguing that mutual fund managers that have performance fees in their fee structure should also be taxed at this lower level or are you just carving out a small exception for a groupd of MA companies, and potentially large political donors, in the name of remaining competitive.

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      p>Finally, the argument is that the tax will make MA less competitive.  That may fly if the tax was a MA tax, but we are talking Federal taxes here.  Applied to gains in CA as much as in MA so the making MA less competitive is difficult to buy.

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      p>This tax break makes absolutely no sense.  Its not their money being invested so there is no reason to tax their “bonus” as capital gains tax rates.

      • … primarily compensated through carried interest…

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        p>

        1) The largest bulk of most VC money comes from investors in their funds and not the VC managers themselves.  The VC managers earn a management fee plus a percentage (usually 20%) of profits from the sale of investment in the companies. So what your really saying here is that the VCs will not invest their investors money in a company unless they can expect to get money back for themselves.  But let’s be clear, most of the money invested money is not theirs, but the money we are talking about taxing is their “bonus” for doing a good job.

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        p>You don’t really understand private equity.  

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        p>Management fees (typically 0.5%) cover administrative overhead only and carried interest on the PROFITS less an agreed upon rate of return of the funds is the manner in which the manager is compensated. So, at the end of the day the fund manager (or general partner in the case of a VC) has to ensure that investors get theirs before he/she gets his/hers…  

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        p>No profits then no carried interest.  

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        p>No carried interest then no income for the fund manager and/or GP.

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        p>This is the sole incentive for the fund manager or GP to grow the fund…  And if the fund doesn’t grow then investors take their money out.  

      • This sector has a presence here, and even if a new measure is “national” in scope, would necessarily  have a greater impact here.

    • Kerry is not protecting Massachusetts relative to other states, he is protecting people who benefit from this tax loophole relative to other taxpayers.

  6. The fund managers get paid a set amount to manage the fund (often 2% of the fund’s value) that is taxed as ordinary income. The fund managers also get paid a ‘bonus’ amount (often 20% of the fund’s profits) that is taxed as capital gain. But the fund manager does not put in 20% of the fund’s assets. The 20% interest that the fund manager has in the profits of the fund should be viewed as a loan from the fund to the fund manager for 20% of the funds value. Then the interest on that loan should be imputed as ordinary income to the fund manager, and any amount of the 20% profits share over that imputed interest amount should be taxed at the capital gains rate, the same rate applied to the other 80% of the profits. Policy-wise it makes sense, because the fund manager is essentially getting a loan from the fund for the 20% share and then the fund us relieving the manager from paying interest on that loan. And politically it splits the baby – some of the carried interest will be taxed as ordinary income and some as capital gain.    

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