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The Washington, DC HustleHow To Think About Yesterday’s Capitol Hill Hearings

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Yesterday both the House and the Senate held hearings on carried interest taxes. (If you missed some of the excitement, check out Dan Primack’s live blog of almost the entire event. He gave up after seven hours and we can’t say we blame him.) The Senate debate focused on how the proposed tax increases on carried interest would impact pension funds that invest in private equity firms. The House hearings were all over the place.
But to focus on the content of the hearings is largely to miss the point. It’s like focusing on fundamentals in a market that is all about momentum. Washington, DC is not a place where things get decided on their merits. It’s a place where they are decided on something that hides in plain sight: politics.
This morning we turned to Tim Carney, a columnist for the Washington Examiner and the brother of DealBreaker editor John Carney, for an explanation of the politics of the tax proposals. His starting place is the head of the Senate Democrats fund raising unit, Charles Schumer. When we spoke to Schumer early this summer, we were surprised to learn that the usually tax-friendly Democratic Senator was undecided on the proposals. Several weeks later he came out against the tax.
“What happened here?” Tim Carney asks. “If you believe The New York Times’ narrative, Schumer sided with his tax-hating Wall Street donor base over his party and his progressive principles, while Obama, Clinton and the bills’ sponsors fought for the little guy, which meant taxing the big guys. The real drama is less black and white, but even more distasteful.”

Back in January, Schumer called leading private equity and hedge fund partners to a dinner in Manhattan, where he told them how the game was played. These partnerships were famously profitable, but unlike other big industries in the U.S., they weren’t playing in Washington. In lobbying and campaign contributions, they seriously lagged behind the energy industry or traditional brokerages.
Schumer’s message that night, as distilled from The New York Times account of it, was: “That’s a pretty nice industry you guys got going. It would be a shame if something happened to it.”

In short, a major factor behind the drive to change the tax treatment of carried interest is completely unrelated to arguments about fairness, efficiency, revenues or economics. It’s about fund-raising for politicians and lobbyists. It’s political rent-extraction.
But, you know, keep arguing the merits if that’s what jazzes you up. Just know that this isn’t what drives the debate in our nation’s capital.
Schumer, Democrats show hedge funds the D.C. ropes [Washington Examiner]