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The Taxation of Carried Interest: A New Republican Idea

trumpThe second Republican debate, on September 16th, involved an exchange on the taxation of hedge fund managers.

One has to get deep into the transcript to find it, but (a) nothing like this was in the “first round” debate and (b) the various candidates all seemed to have been prepared for the matter should it arise this time. So it is worth some investigation.

Within the “four corners” of that transcript, it was the moderator who brought it up, not any one of the candidates. But in terms of the broader campaign, this has been Trump’s issue.

Kasich’s Careful Word Choice

Indeed, the moderator, Jake Tapper, raised the question in this way, addressing Governor John Kasich: “Donald Trump says that the hedge fund guys are getting away with murder by paying a lower tax rate. He wants to raise the taxes of hedge fund managers, as does Governor Bush. Do you agree?”

Donald Trump has been the moving factor in the injection of this issue into the primary campaign because it is integral to his “brand.” He’s both a billionaire and a populist. Not all that unusual a combination, but one that requires the fulfillment of various roles. In fulfilling them, the Donald cites his business successes as proof that he could negotiate with foreign governments as president. His business failures, the corporations he has steered into bankruptcy, he tosses aside when confronted as just examples of “using the system,” like everybody else. Meanwhile, he wants to be seen as a tribune of the little guy. So he has to go after some of his fellow Big Guys.

Kasich didn’t really want to discuss the issue, though he was prepared for it. He began his answer to Tapper’s question thus: “I don’t [agree with that tax proposal] at this point in terms of changing the incentives for investment and risk taking.”

Now that was carefully worded. He doesn’t agree “at this point.” So if you really have your heart set on the idea, anonymous Republican voter out there, you can hope that Kasich will be brought around to it at some later “point,” perhaps by inauguration day.

In the meantime, whatever he’ll do to their taxes, you can feel some assurance that he won’t do anything similar to your taxes, because immediately after blowing off Tapper’s question, Kasich went back to what he really wanted to talk about, his record as a tax cutter in Ohio. He is “the person that lands that plane,” rather than just “someone who talks about it.”

Working on the Details

When Tapper did bring the hedge fund question directly to Mr. Trump, Trump said that he was working on a detailed tax plan. “I’m putting in the plan in about two weeks, and I think people are going to like it. It’s a major reduction … for the middle class. The hedge fund guys won’t like me as much as they like me right now. I know them all, but they’ll pay more.”

What a perfectly Trumpian answer that was. He couldn’t say that he was going to increase the taxation of carried interest without also asserting that “right now” he is in tight with that crowd, he “knows them all.” The populist and billionaire can’t let go even for a single paragraph on a transcript of either of the halves of that brand. He has to talk the populist talk while emphasizing that he has lived the billionaire’s life.

Governor Walker was the last one to speak to the issue of the tax code. He expounded on his own record as a tax cutter in Wisconsin, before saying that he wasn’t just “about” cutting, the point was rather to “reform” taxes in order to “help people create jobs.” What that means for the taxation of carried interest he didn’t say. Again, you can project into that call for “reform” what you want, which presumably was the idea at his debate prep sessions.

And from there the issue of taxation drops out of the transcript, with talk turning to the minimum wage, and who could best go up against Hillary Clinton tactically.

The lesson from all this, I submit, is that the issue of the taxation of carried interest is a live one now in Republican circles. It is possible to retain one’s Republican/conservative cred, to avoid the taint of being a “RINO,” [not a term anyone applies to Bush family members], while still arguing that hedge fund managers need to take a hit.

I don’t expect that Donald Trump will be the next President, or will have anything much to say about any real world rewrite of the tax code in any capacity. Indeed I personally suspect his campaign has already peaked. But the descent from that peak may be a slow one – he’ll be around for months yet. And, in the meantime, the issue he has injected into the Republican bloodstream will stay there.