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(Washington D.C.)- Let's be clear what's involved in the pay-fors: tax-haven legislation, also the issue of fairness.
Those who invest their own money will continue to receive capital gains tax treatment, period. Those who manage other people's money will have to pay ordinary income tax like everybody else who performs services. There is widespread support for this.
Gregory Mankiw, who was on President Bush's Council of Economic Advisors, said this: “Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such ..... When I wrote my book, that was sweat equity ..... I oppose different levels of taxation on different types of compensation.”
This from a former member of President Reagan's Council of Economic Advisors, William Niskanen: “The share of investment profits are basically fees for managing other people's money.”
Also, another person who was deputy undersecretary under George H.W. Bush, Professor Michael Graetz: “I think it's odd that people making that much money off of essentially labor income should be paying lower rates than, than the average ..... than their secretaries are, to put it baldly.”
And then from the New York Times: “They're actively managing assets, and should be taxed accordingly as managers earning compensation ..... Congress will achieve a significant victory, for fairness and for fiscal responsibility, if it ends the breaks that are skewing the Tax Code in favor of the most advantaged Americans.”
And likewise, the Washington Post: “But these fund managers, for the most part, are not risking their own money.” And I insert to the extent they are, they get capital gains treatment. “Besides, plenty of risky industries don't enjoy comparable tax benefits. Income earned from managing an investment partnership fund should be treated just like the income earned for providing any other service.”
And I could quote this from William Stanfill, who's a manager of venture capital. He says, “Many Americans invest sweat equity in their jobs and their businesses, take risks, contribute to the economy, and may have to wait a long time before their hard work pays off. But they still pay ordinary income tax rates on their compensation. To the extent we take risk, we take it with other people's money.”
And that's why the statement of administration policy is very clear from the President. “The legislation would fulfill the administration's commitment to crack down on overseas tax havens and put a stop to billions of dollars' worth of tax abuse and would end the special preferential treatment for carried interest income.”
I think it's important that we look at the facts here. The gentleman from Texas and others have raised issues regarding real estate. These are the figures that have been compiled by our staff based on IRS data. That less than 10 percent of all of the income earned in real estate construction and development is earned by partnerships that might be involved here, that less than 5 percent of all wages earned by employees in real estate construction and real estate development are earned by employees of partnerships.
Ninety percent of the income earned in real estate construction and real estate development is earned by C corporations or S corporations. Let me just say, in terms of corporations that are involved in real estate, when they give stock options, when those are exercised, and these are the vast majority of cases, the people who exercised the stock option pay ordinary income tax.
Essentially, you have here an argument undercutting the basic proposition. That is that those who invest their own money get capital gains treatment and those who provide services, in whatever circumstances, they pay ordinary income tax.
Also let me just mention that the President has suggested some specific provisions that will encourage investment. There is a basic structure in question here, a basic structure. When people invest their own money, they should pay capital gains tax on the profits. When they perform services managing other people's money, like everybody else who performs services, should they not pay ordinary income tax as does the waitress, no money except a small amount of minimum wage, and not even that, perhaps, if there are no tips; and the author, if the books aren't sold, then they don't get anything.
What is being proposed here, as I said earlier, is what has been suggested by economists, whether they are conservative, moderate, liberal, whatever you want to call them, and by various other sources. That there is a basic issue here. This legislation is an effort to address that basic issue and to pay for the tax extenders. In previous years, in so many cases, you have passed legislation without paying for it and the debt goes up and up. }
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