VICTOR FLEISCHER: OPPONENT OF ‘CARRIED INTEREST’

“The person most responsible for inspiring the movement against the carried-interest tax loophole is Victor Fleischer, a tax-law professor at the University of San Diego School of Law. Fleischer, the son of two college professors in Buffalo, became aware of the loophole in the late nineteen-nineties, when he was working as a tax attorney at Davis Polk, in New York. Fleischer does not consider himself particularly liberal. He is motivated, he told me, by a basic idea. ‘It’s important to think about how the tax system treats people. The tax system has to fund the government and the government has to do things for everyone.’

“For more than a decade, Fleischer has argued that the loophole contributes significantly to income inequality, by inflating what he calls the ‘alpha income’ of financiers in the top one per cent of the one per cent. In legislative circles, he is among the foremost authorities on the issue.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

RICHEST PAY TAXES AT A LOW RATE

“In 2006, [Victor] Fleischer, then an untenured professor at U.C.L.A., circulated a research paper, his first on the carried-interest loophole, called ‘Two and Twenty.’ (It was published two years later, in the New York University Law Review.) He argued that the compensation scheme in private-equity firms meant that partners were not taking the kind of risk for which the capital-gains tax was designed. ‘If the fund does well, the managers share in the treasure,’ he wrote. ‘If the fund does badly, however, the manager can walk away.’ He noted that some partners were even taking a portion of their management fees in the form of carried interest, to increase the tax advantage. ‘This quirk in the tax law allows some of the richest workers in the country to pay tax on their labor income at a low rate.’”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

BLACKSTONE BILL

“Max Baucus, of Montana, and the top Republican, Chuck Grassley, of Iowa, produced a bill to close one part of the loophole, which covered the corporate taxes of publicly traded companies. It was nicknamed the ‘Blackstone bill,’ because that firm [the Blackstone Group] was then preparing a $4.7-billion public offering. Senator Barack Obama was one of the bill’s four co-sponsors.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

RENEWED VALUE OF ‘CARRIED INTEREST’

“Before the two-thousands, the taxation of partnership income had never been cause for public debate. It became largely moot in 1986, when a tax-reform deal signed by Ronald Reagan equalized the rates for capital gains and top-bracket ordinary income. But George H. W. Bush and Bill Clinton raised taxes on ordinary income, and Clinton, in 1997, cut the tax on capital gains significantly. Five years later, George W. Bush cut rates on both kinds of compensation, and there was, once again, a big advantage in having one’s pay categorized as capital gains. And a growing industry was poised to profit from that distinction.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

$3 MILLION BIRTHDAY PARTY

[David Rubenstein of the Carlyle Group is “more modest than counterparts such as [Stephen] Schwarzman, [in 2016 CEO of the Blackstone Group] who in 2007 threw himself a now infamous three-million-dollar birthday party at the Park Avenue Armory, in New York, and who spends more freely in politics, especially on Republican candidates.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

SEVEN RECEIVED CARNEGIE MEDAL OF PHILANTHROPY

“One afternoon last October [2015], [David] Rubenstein and his mother gathered . .  . .to receive the Carnegie Medal of Philanthropy, along with seven others, including Microsoft’s co-founder Paul Allen and the Utah industrialist Jon Huntsman, Sr.” 

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

GOSPEL OF WEALTH

“In 1889 Andrew Carnegie [the Pittsburgh steel millionaire] published The Gospel of Wealth, his Gilded Age manifesto. He believed that concentrated wealth was essential to capitalism, but that much of that wealth must be given away, in order to maintain a ‘reign of harmony’ with the poor. . . . . Warren Buffett and Bill Gates frequently invoke Carnegie when they speak of their Giving Pledge campaign, which commits billionaires to giving away at least half their money. A hundred and forty others have signed it, including [David] Rubenstein, Carl Icahn, Michael Bloomberg, Mark Zuckerberg, and Elon Musk.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

PRESIDENT BARAK OBAMA: ‘BETTER THAN OTHER NATIONS’

[Excerpt from a conversation between President Obama and the novelist Marilynne Robinson conducted in Des Moines, Iowa, on September 14, 2015. An audio recording of the conversation can be heard at itunes.com/nybooks. The first part appeared in the November 5, 2015, issue of The New York Review.]

PRESIDENT BARAK OBAMA: “ . . . it is interesting watching the current political season for me because I’m not on the ballot, so although obviously I still have a huge stake in the outcome as a citizen, in addition to soon being an ex-president—and there are times where I’m listening to folks make these wild claims about how terrible America is doing, and I want to just press the pause button here for a second and remind them that by almost every economic criterion we are hugely better off than we were just seven years ago; that we have done far better than almost every advanced country, and certainly every large advanced country on earth, in terms of growing the economy, driving down unemployment, managing our budgets.

“And the only thing that right now is holding us back is Washington dysfunction. We could knock off another percentage point on the unemployment rate if we started rebuilding roads and bridges and airports.”

Editors of the New York Review, “President Obama & Marilynne Robinson: A Conversation in Iowa,” New York Review, November 19, 2015, pp: 6-8.

BRETTON WOODS CONFERENCE

“Persistent financial turmoil has led to demands for reform or reinvention of this ad hoc system from advocates such as Joseph Stiglitz, the Nobel laureate economist, George Soros, the investor, and Zhou Xiaochuan, the long-serving governor of the People’s Bank of China (the central bank). Not surprisingly, it has also reawakened interest in the one period when exchange rates, rather than being left to the caprice of events, were governed by international agreement. Roughly from the end of World War II until the early 1970s, the world’s currencies were locked at fixed rates of exchange to the dollar, which served as the reserve currency, interchangeable with all others. This was the so-called Bretton Woods system, named for the mountainous retreat in New Hampshire where, in the summer of 1944, forty-four Allied nations convened to hammer out a monetary agreement.

. . . . . . . . . . . . . . . . . . . .

            “ . . . under Bretton Woods, capital imbalances among nations were relatively muted and banking crises were rare, as were defaults by countries on ‘sovereign debts — the money borrowed directly by governments. During the Bretton Woods period, inflation was high, but standards of living rose around the globe. Banking represented a far smaller share of economic output than in the freewheeling financial climate that has prevailed lately, and inequality was less pronounced. If Bretton Woods cannot claim credit for all of these conditions, it was part of an architecture of financial regulation that, since the 1970s, has been relentlessly dismantled.”

Roger Lowenstein, “The New Fundamental Order – Until It Collapsed,” a review of The Summit: Bretton Woods, 1944: J. M. Keynes and the Reshaping of the Global Economy, by Ed Conway in the New York Review, December 3, 2015.

18 PRIVATE EQUITY EXECS WORTH $2 BILLION EACH

“Until recently, relatively little attention had been paid to one source of [David] Rubenstein’s wealth, which he has quietly fought to protect: the so-called carried-interest tax loophole. The tax break has helped private equity become one of the most lucrative sectors of the financial industry. Since the end of the recession, private equity has reported record profits, and at least eighteen private-equity executives are estimated to be worth two billion dollars or more each. And during the current Presidential campaign, with its populist themes, the loophole has become a target among Democrats and Republicans alike.

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

LOOPHOLE SAVED EACH CARLYLE PARTNER $50 MILLION IN TAXES OVER FOUR YEARS

“In 2012, when [the] Carlyle [Group] made its first offering of public stock, it reported that Rubenstein, D’Aniello, and Conway — [Stephen] Norris departed in 1995—had been paid about a hundred and forty million dollars each the previous year, an amount that dwarfed the pay of nearly all top C.E.O.s that year. (Jamie Dimon, of JPMorgan Chase, made twenty-three million dollars.) They had also received significant returns on their own investments in Carlyle funds: [David] Rubenstein collected fifty-seven million dollars, D’Aniello seventy-eight million.

“Of that hundred and forty million in pay, a hundred and thirty-four million came from the firm’s share of its investors’ profits. The filings make it difficult to determine the exact distribution, but industry experts say that at a large firm like Carlyle three-quarters of a partner’s pay typically comes out of carried interest. By that calculation, the loophole would have saved the partners about twenty million dollars each, in 2011 alone. Over the next four years, each partner’s savings would have amounted to more than fifty million dollars.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

FRIENDS IN HIGH PLACES

“Over the years, [David] Rubenstein’s Democratic allegiance has loosened. In 1990, Carlyle put George W. Bush, who had just left the oil business in Texas, on the Caterair board. In the late nineties, Rubenstein and Rogoff still hosted the [Jimmy] Carters at their Nantucket vacation home, but they more often socialized with George and Barbara Bush. In 2000, Rubenstein, Rogoff, and their three children (two daughters and a son, now grown) accompanied Barbara Bush and her grandchildren on a safari. That same year, Rubenstein and Rogoff attended Barbara Bush’s seventy-fifth-birthday party, in Kennebunkport.

“Rubenstein has admitted that his relationship with the Bush family affected his politics, but he also developed strong ties with the Clinton Administration. In 2001, Carlyle hired two former Clinton officials—the chairmen of the Federal Communications Commission and the Securities and Exchange Commission. For years, Rubenstein has refrained from contributing to political campaigns, and Carlyle has never formed a political-action committee. Rubenstein told Reuters in 2012, ‘I don’t really try to get involved politically by giving money to politicians or by saying I’m a Democrat or Republican. Right now, I just view myself as an American.’ Last year, when President Obama visited Anchorage, he had dinner with Rogoff at her home.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

FRIENDS FROM THE WHITE HOUSE

“In 1981, he [David Rubenstein] took a job in the mergers-and-acquisitions group at the Washington-based law firm Shaw, Pittman, Potts & Trowbridge, but he soon started exploring a career change. Legal work bored him, and he was in touch with friends from his days at the White House who were prospering in business.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

BILLIONAIRES HAVE IMPORTANT FRIENDS

“In September of that year [1987], [David] Rubenstein founded the Carlyle Group, with [Stephen] Norris; Dan D’Aniello, of Marriott; and William Conway, of the telecom giant M.C.I. The firm was named for the New York hotel, to evoke old-money grandeur. The partners soon brought in Frank Carlucci, Ronald Reagan’s final Secretary of Defense. Fred Malek, the former deputy chairman of the Republican National Committee, did consulting work for the firm.

“Carlyle struggled in its first several years, making an unsuccessful venture into airline food, with Caterair, and losing a bid for the restaurant chain Chi-Chi’s. In 1990, though, the focus on Washington paid off. Thanks mainly to Carlucci, Carlyle was able to buy B.D.M., Ford Aerospace’s defense consultancy, which was the first of many military-industrial investments. (Seven years later, having expanded B.D.M.’s operations into Saudi Arabia, Carlyle sold the consultancy, making a six-hundred-and-fifty-per-cent profit.)

“Two members of the George H. W. Bush Administration, Richard Darman, the budget director, and James Baker III, the Secretary of State, joined Carlyle when they left the government. In the late nineteen-nineties, the ex-President [George H. W. Bush] himself came on board and helped position the firm to win a bidding war for one of South Korea’s top banks. The firm branched out into new industries, buying ownership stakes in Dunkin’ Donuts and Hertz, among many others.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

GREAT ESKIMO TAX SCAM

“In 1986, Stephen Norris, a lawyer for, learned of a change to the federal tax code recently initiated by Senator Ted Stevens, Republican of Alaska. It allowed Alaska Native corporations, created under the Alaska Native Claims Settlement Act, to sell their paper losses at a discount to companies that could use them to reduce their own taxes. Norris started a business that matched companies with Native Alaskans and persuaded [David] Rubenstein to leave Shaw, Pittman and join him. In a single year, they brokered the transfer of a billion dollars in losses, earning at least ten million dollars in fees. In 1987, they were on the verge of another big transfer when the government closed that loophole. The episode became known in Washington business lore as the Great Eskimo Tax Scam.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

LOOPHOLE UNCHANGED

“Private-equity partners argue that their tax treatment is justified under the tradition of encouraging risky business partnerships and is necessary for their industry to flourish. So far, the partners have won out: despite the rise of anti-Wall Street sentiment after the 2008 financial collapse, the loophole has withstood every effort at reform.

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

CLOSING THE LOOPHOLE

“Barack Obama, during his first Presidential campaign, pledged to reform the tax on carried interest and, in 2012, went after Mitt Romney for having enjoyed its benefits as the co-founder of Bain Capital. This year, Bernie Sanders, Hillary Clinton, and Donald Trump have all attacked the loophole, often using hedge-fund managers as the rhetorical target. As Trump put it in August [2015], ‘They’re paying nothing, and it’s ridiculous. . . . These are guys that shift paper around and they get lucky.’ Jeb Bush, who made a foray into private equity in 2014, also called for closing the loophole during his ill-fated campaign.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

COMBINE CAPITAL LOBBYING WITH POLITICALLY CONNECTED PEOPLE

“At that time [1981], the first ‘leveraged-buyout firms,’ as private equity was then called, were springing up in New York and Boston, led by groups such as Bain Capital and Kohlberg Kravis Roberts. [David] Rubenstein decided to apply to this line of business what he’d learned in Washington about lobbying. Nobody in private equity had yet thought to choose partners chiefly on the basis of their relationships with government officials and their knowledge of regulated industries. Gary Shapiro, then a lobbyist for the consumer-electronics industry who worked alongside Shaw, Pittman in one lobbying fight against Hollywood, recalls hearing Rubenstein’s pitch when they travelled together to Japan, in the early eighties: ‘His vision was to combine capital with politically connected people whose phone calls are accepted around the world. We laughed at him, like, Yeah, right.’”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

DAVID RUBENSTEIN BIOGRAPHY

“David Rubenstein, who is sixty-six [2016], grew up in Baltimore, in a two-bedroom row house in the city’s northwestern corner, which was then predominantly Jewish. His father sorted mail for the postal service, and his mother was a homemaker. As a student at City College, a premier, boys-only public high school, Rubenstein was serious-minded and kept to himself. ‘He was very, very quiet’his fellow-student Kurt Schmoke, who, in 1987, became the city’s first elected black mayor, told me. ‘He liked to talk about government and politics — not so much about business.’

“In 1975, after graduating from Duke [University] and then the University of Chicago law school, and spending two years at the corporate law firm Paul, Weiss, in New York, Rubenstein served as the counsel to Senator Birch Bayh, Democrat of Indiana, on the Subcommittee on Constitutional Amendments. A year later, at the age of twenty-six, he joined Jimmy Carter’s Presidential campaign as a policy aide and was subsequently hired as a deputy to Stuart Eizenstat, President Carter’s domestic-policy adviser. Rubenstein helped write memos for Carter, prepare him for press conferences, and draft State of the Union addresses.

“At the White House, Rubenstein subsisted on vending-machine snacks, staying late enough to get his briefing papers at the top of Carter’s stack. ‘He was almost painfully shy,’ Eizenstat told me. ‘He almost never spoke to the press. He kept his head down. He almost never spoke in meetings.’ On his late shifts, Rubenstein got to know Alice Rogoff, an assistant to the director of the Office of Management and Budget, when she came by to drop off memos. They married in 1983; Rogoff is now an arts philanthropist and the owner of the Alaska Dispatch News, the state’s largest newspaper. (She lives part time in Anchorage.)

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

CARLYLE GROUP

“In 1987, after a short career in politics, [David] Rubenstein founded the Carlyle [Group], building it around his Washington relationships and those of his partners—‘access capitalism,’ Michael Lewis called it, in a critical 1993 profile of Rubenstein in The New Republic. For the most part, Rubenstein has received favorable press coverage, including widespread praise for his charitable work.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

CARLYLE GROUP

“In 1987, after a short career in politics, [David] Rubenstein founded the Carlyle [Group], building it around his Washington relationships and those of his partners—‘access capitalism,’ Michael Lewis called it, in a critical 1993 profile of Rubenstein in The New Republic. For the most part, Rubenstein has received favorable press coverage, including widespread praise for his charitable work.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

GETTING 20 PERCENT OF THE PROFITS FOR YOURSELF

“One name for the tax break is the ‘hedge-fund loophole,’ but hedge funds benefit much less than private equity does, because their trades tend to be too short-term to qualify for the low capital-gains rate. At a Credit Suisse forum in Miami, in 2013, [David] Rubenstein said of private equity, ‘Carried interest is really what the business has historically been about — producing distributions for your investors from good sales and I.P.O.s . . . and getting twenty per cent of the profits for yourself.’ He went on, ‘That’s how we’ve really grown our business.’”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

‘2 AND 20’ COMPENSATION

“Even if no profits are realized, private-equity firms get paid: under the ‘2 and 20’ compensation structure, they receive a two-per-cent fee annually on assets under management, in addition to a twenty-per-cent cut of profits beyond a given benchmark. The I.R.S. characterizes the managers’ cut of the profits as carried interest, taxing it as though it were capital gains made through the sale of a person’s own investment. For most of the past fifteen years, long-term capital gains have been taxed at fifteen per cent, compared with thirty-five per cent for ordinary income in the top bracket.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

HOW ‘CARRIED INTEREST’ TAX BREAK WORKS

“It [carried interest]came into its modern usage in the nineteen-twenties, in the oil-and-gas industry, and was enshrined in the federal tax code in 1954. When a group of partners drilled for oil, a few would put up the money and others would invest only their labor, or ‘sweat equity’— finding land and investors, buying equipment, and so on. If the partners sold out, the I.R.S. would tax the profits of all the partners at the lower rate for capital gains rather than as ordinary income.

“Over time, partnerships in other industries, mainly real estate and venture capital, began taking advantage of the same form of taxation. Private-equity firms stretched the model to its breaking point. Their work is essentially a combination of investment banking and management consulting: they are compensated not for building new ventures from scratch, with the risk that entails, but for managing the investments of wealthy individuals and pension funds and other institutional clients. These funds are pooled, along with borrowed money, to acquire private companies or to take public companies private—before making improvements or cutting costs and selling at a big profit.”

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.

WALL STREET PHILANTHROPISTS

[On August 23, 2011, an earthquake shook the Washington Monument. One of the two strongest quakes ever recorded east of the Rockies, it fractured two dozen of the stone protrusions that hold up the marble slabs at the monument’s peak. Within weeks, David Rubenstein, the co-founder of the Carlyle Group, a private-equity firm, announced that he would provide the funds. Rubenstein, with an estimated net worth of $2.6 billion, is one of the wealthiest people in Washington.]

……………………………………..

“Many of today’s Wall Street philanthropists win the public’s esteem by giving away money that, without the [carried interest] loophole they’ve fought to protect, would not all have been theirs to donate. ‘I don’t want to bash the philanthropy, because it does good,’ Victor Fleischer told me. ‘But we’re creating what’s essentially a parallel system, where a small number of individuals control quasi-public spending, and that will reflect their values and not democratic values.’ Of Rubenstein, he said, ‘It’s great that he’s helping out with the Washington Monument. But, if we had a government that was better funded, it could probably fix its own monuments.’ ♦

Alec MacGillis, “The Billionaires’ Loophole,” New Yorker, March 14, 2016, pp: 64-73.