How Democrats Are Capitalizing on a Donald Trump Tax Proposal

How Democrats Are Capitalizing on a Donald Trump Tax Proposal

Rick Wilking

It’s football season, and one of the concepts commentators often go on about is the ability to “read and react.” Every play yields a bevy of choices that a quarterback must recognize and then respond to. What kind of coverage is the defense in? Are they blitzing? Are the linebackers playing too soft on underneath routes? Making these reads and then delivering the best option in reaction is the difference between a good and bad offense.

The Democratic Party has decided to read and react to one of the continual injustices of our tax code: the so-called carried interest loophole. For years, liberals have decried the fact that hedge fund managers can pay taxes at a lower rate by classifying the compensation they get when their fund performs above a certain threshold as capital gains. This has not led to a successful change of the law. But now that Republican presidential candidates, led by Donald Trump, have given them an opening, the entire party — even the Democrats’ leading opponent of closing the loophole — is making their move.

President Obama took the lead on this yesterday with remarks before the Business Roundtable, a lobbying group. For years, the president has supported closing the carried interest loophole, which costs $18 billion over 10 years, according to Obama’s Treasury Department. (Tax expert Victor Fleischer of the University of San Diego puts the number 10 times higher). But he’s had no success in eliminating it, thanks in part to members of his own party like Sen. Chuck Schumer of New York, who has historically opposed the change.

Then Trump went on “Face the Nation” and shouted that “hedge fund guys are getting away with murder,” paying miniscule effective tax rates because of the loophole. Last week, Jeb Bush formalized the policy shift in his tax proposal. In the CNN debate on Wednesday, George Pataki and Bobby Jindal followed suit.

Related: Trump, Obama and Bush Agree: Close the Carried Interest Tax Loophole

Bush’s plan, contrary to popular belief, wasn’t populist; since he also slashes the top marginal tax rate, forcing hedge fund and private equity managers to treat money-management profits as income wouldn’t hurt them much, especially when factoring in the other gifts they’d receive from his plan. Similarly, Rick Santorum’s flat tax proposal equalizes income and capital gains tax rates. Rand Paul, Ben Carson, Ted Cruz and Mike Huckabee have done the same. While the flat tax rates are so low that the wealthy will surely benefit, the practical effect is that the majority of the GOP field wants to end the carried interest loophole.

Obama saw the clear opportunity. On Wednesday, he said, “you’ve got two leading candidates on the Republican side who’ve said we should eliminate the carried-interest loophole.” He noted it as a potential area of common ground and suggested that the savings could be used to increase spending on discretionary programs as part of an overall compromise on the budget, which expires Sept. 30.

Schumer, the former opponent, picked up the signal. Yesterday he held a press conference featuring the full ideological sweep of the Senate Democratic caucus — from Elizabeth Warren to Mark Warner. And they all sung from the same script.

“While the tax plans we’ve seen from Republican candidates on the whole are wrong for the country,” Schumer said, “their plans to close the carried interest loophole… could help break the logjam over the budget and help us reach an agreement this fall.” Schumer’s visual aid featured Trump and Bush at podiums, with captions of their support for closing tax loopholes.

Related: Trump Is Forcing GOP Candidates Into an Immigration War Nobody Wants

This puts Republican Congressional leaders in a bind. They have no interest in raising taxes, but the candidates hogging the political spotlight — Trump and Bush — have endorsed it. And while the Congressional leadership insists on delaying any tax changes unless incorporated into a broader reform, a familiar tactic to stop all movement, the Democratic aggressiveness in sticking the question into the budget debate raises the pressure.

Senate Democrats, if they hold together, can block any government funding extension through the filibuster. Their votes will be needed to reach a resolution. And with Schumer on board, the caucus is united. With all the Democratic candidates, from Hillary Clinton to Bernie Sanders, supporting closing the loophole too, the subject is sure to stay in the media, making life difficult for John Boehner and Mitch McConnell.

The pouncing on the issue by Schumer and his colleagues reflects a key strategy headed into the budget wars, to leverage Trump’s notoriety to force Republicans in Congress into a corner. Trump, who has blasted corporate-written trade deals as well, will make it extremely difficult for the very fragile coalition that passed trade promotion authority to successfully advance any agreement like the Trans-Pacific Partnership (TPP) in an election year. And now, his full-throated condemnation of hedge fund tax maneuvers signals real problems for their cherished loophole.

The Republican candidates’ position represents an interesting and little-recognized dynamic in the race: taking the side of banks over their financial competitors. For instance, Jeb Bush’s tax plan eliminates the tax deductibility of interest payments, which would really impact private equity firms that load tax-preferred debt upon the companies they purchase, and real estate firms that profit from leverage. But Bush’s provision has one giant exception: banks.

Related: Trump Inc: 17 Ventures Branded By Trump

This competition between corporate interests is actually raising standards rather than reducing them, with the public potentially benefiting from banks trying to stick it to their rivals. Hedge fund and private equity managers obviously have the wherewithal to protect their tax breaks, given their money and influence. But banks have even more of both.

James Stewart of The New York Times credits Trump with having “done more to put a stake in the heart of the carried interest tax loophole in the last month than the Obama administration has in the last six and a half years.” It is true that the issue had receded into the background until Trump raised it. But Democrats had to read that and find a wedge, with the looming budget debate.

Four years ago, the eventual Republican nominee, private equity kingpin Mitt Romney, benefited handsomely from the carried interest loophole. This year, those aiming to be his successor are helping to kill it off.