Director of Federal Tax Policy
With the country facing high unemployment and a weak economy in the short term and severe budget problems in the long term, you’d think that senators negotiating a jobs bill would be trying to maximize both its short-term economic boost and its long-term budget savings. You’d be wrong.
In fact, senators trying to extract final concessions as the price of supporting the bill are pushing in the opposite direction.
They are trying to whittle down the measure’s temporary state fiscal assistance and help for unemployed workers, despite abundant evidence that these measures will save jobs, help the jobless, and boost the economy.
At the same time, they are trying to weaken or eliminate provisions designed to crack down on well-known tax loopholes, which would generate long-term budget savings in an efficient manner.
Specifically, they are caving in to (1) private equity managers who don’t want to pay taxes on their income (known as their “carried interest”) at the same rates everybody else faces on their income and (2) lobbyists seeking to convince Congress not to address a serious compliance problem with “S corporations” that government watchdogs have identified.
Regarding carried interest, which is the share of a private equity fund’s profits that a fund manager can receive without having to contribute a corresponding share of the fund’s capital:
The S corporation issue has received less attention but is just as problematic. Shareholder-employees of S corporations receive both wages from the firm and a share of the firm’s profits, but they pay payroll tax only on their wages. Not surprisingly, many small proprietors establish themselves as S corporations and then underpay themselves in salary (taking more of their compensation in profits), thereby avoiding payroll taxes that other taxpayers pay.
The nation’s short- and long-term challenges call for an aggressive policy response to encourage the nascent economic recovery without aggravating out-year deficits. By weakening the jobs bill’s measures to stimulate the economy and close egregious tax loopholes, the Senate has got it backwards.