That, after all, is who uses the carried interest loophole. That's the rule that lets financiers like venture capitalists and private equity managers have the performance fees they receive for investing other people's money taxed at the long-term capital gains rate of 23.8 percent instead of the top ordinary income rate of 39.6 percent. Even Trump, who erroneously believes that this helps hedge fund managers more than anybody else (it doesn't because they're usually not investing in things for the 12 months it also takes to qualify for the long-term capital gains rate), thinks that the people who take advantage of this are “getting away with murder” since they're “making a lot of money” but “aren't paying anything.” Which, of course, is why Trump wants to get rid of this loophole and … replace it with an even more unjustifiable one?

AD

AD

Actually, yes. Trump, you see, has also come out in favor of cutting taxes on pass-through businesses all the way down to 15 percent. And guess which type of businesses, among many others, are organized as pass-throughs. That's right: venture capital, private equity and hedge funds. What does this mean exactly? Well, pass-throughs are just a kind of corporate structure where the owners pay income tax on their share of the profits rather than the company itself. So, for a successful enough business, that means they'd owe 39.6 percent right now. That, as we said before, is what makes carried interest so lucrative that private equity billionaire Steve Schwarzman once whined that taking it away would be “like when Hitler invaded Poland in 1939.” It lets Silicon Valley and Wall Street financiers pay only 23.8 percent in taxes on the bulk of their income. But that would be irrelevant if they owed only 15 percent in the first place. The super-rich don't need a big tax loophole if Trump wants to give them an even bigger tax cut.

Indeed, it would be huge and hugely wasteful. The problem is that cutting taxes on pass-throughs doesn't incentivize people to start them so much as to pretend that they have. That, at least, is what happened in Kansas when it entirely eliminated its state taxes on them. People quite legally set up their own “corporations,” which allowed them to claim that they were no longer employees of wherever they worked, but rather contractors. The result was that whatever they made wasn't taxed at the state level. Kansas University basketball coach Bill Self was perhaps the best example of this with all the “basketball consulting” work his LLC was supposedly doing. Even the conservative Tax Foundation, which loves tax cuts about as much as Trump loves golf, thinks that what Kansas did with pass-throughs only “encourages tax avoidance without generating desired growth.” It's no surprise, then, that the nonpartisan Tax Policy Center estimates that Trump's pass-through plan would cost about $1.9 trillion over the next 10 years — 68 percent of which would go to households making $1 million or more.

That's more than the administration can afford to lose if it wants to cut taxes for other businesses. It's pretty simple. More than anything else, Trump wants to slash the main corporate tax rate from 35 percent to 15 percent. But even doing that on a temporary basis would cost quite a bit of money for quite a long time, which means he'd have to close quite a few loopholes to pay for it. That's because you aren't allowed to add to the deficit outside the 10-year budget window if you're going to pass something with just 51 votes in the Senate, as Republicans are hoping to, instead of the 60 it takes to beat a filibuster. And since they're having a hard time coming up with anything they'd be willing to do to pay for their corporate tax cut, it's hard to believe they could find $1.9 trillion more to pay for their pass-through one, too. In other words, Trump might have to choose between cutting taxes for Fortune 500 companies and for private equity gurus.

AD

AD

So, in true populist fashion, Trump is thinking about keeping Wall Street's favorite tax loophole now that they might still need it. His Treasury Secretary Steven Mnuchin says that they're considering “closing the loophole for hedge funds” while preserving it for “other types of funds that do create jobs.” This is either ignorant or misleading. Hedge funds, after all, don't really benefit from carried interest. They aren't, as University of San Diego Law Professor Victor Fleischer points out, typically investing in things long enough to be eligible for it. But the people who do are the venture capitalists and private equity managers who, with varying degrees of plausibility, can claim to be adding jobs. Which is to say that Trump might tell the people who aren't using the loophole that they can't, and the people who are that they can.

This was the perfect Trump con. He pretended that he'd raise taxes on the super-rich while actually proposing to cut them to the same rate that someone making $10,000 pays. And then he pretended to pretend that he'd raise taxes on them when it looked like his tax cut might not happen.

Trump really is a class warrior — on behalf of the people who live in gold houses.