Victory for a Loophole

Capital Gains treatment for "carried interest" now seems likely to survive this session of Congress.

As regular readers of this blog know, I am against cap gains treatment in this area. It is a paradigm of a an inequitable tax loophole.

There is room for reasonable argument about what exactly ought to be done to close this loophole, but that it ought to be closed, nobody who has viewed the situation in a dispassionate way seems to doubt.

Yet year after year, Congress has proven incapable of acting.

As to this year specifically: under the bill approved by the House of Representatives on May 28, 2010, the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), 75 percent of carried interest will be taxed as ordinary income beginning in 2013. The remaining 25 percent will continue to be taxed as capital gains. During the transition period until 2013, under this bill, 50 percent will be taxed as capital gains, 50 percent as ordinary income.

That was a detail within a big bill with other motives. The overriding purpose of the bill was to extend unemployment benefits further. Republicans didn't like that and demanded budget neutrality -- i.e. assurances the bill would not contribute to the deficit. That set off the search for loopholes to close and, in fixing upon the cap gains treatment of carried interest, the legislative draftsmen found a good one.

On Tuesday, June 8, the Senate Finance Committee, chaired by Max Baucus (D-Mont.) amended the House bill in the form of a substitute. There were some important changes, including some in the provisions dealing with carried interest, but nothing a conference committee couldn't have patched up.

It now appears that there won't be a conference, because the bill can't get through the Senate. The Republicans (with just one Democratic ally, and one Independent ally) have successfully filibustered the unemployment extension there. The provisions closing the loophole weren't the reason for the filibuster, so far as I can tell, but they are casulaties nonetheless.