Ending Tax Loophole Fraud One State at a Time

Stephen A. Schwarzman, chairman and chief executive officer of the Blackstone Group, on a Fox Business show in New York City on February 27, 2014. Leo Hindery Jr. writes that he was pilloried by businessmen like Schwarzman and dubbed a traitor to his class for daring to criticize the rich man’s tax dodge, the carried interest tax loophole. Brendan McDermid/reuters

There is an economic imbalance in this country that is growing at an unsustainable rate.

The anger and frustration laid bare by the 2016 presidential campaign shows young people by the millions worrying about their economic future, while their parents fret about debts and their own retirement security.

For them, the American dream is muted.

You either believe that America and Americans can survive and prosper with these acute, egregious imbalances, or you don't. And if you do, it's probably because you're personally benefiting from them, which in my opinion is extreme selfishness.

I still remember when Stephen Schwarzman, co-founder of the Blackstone Group, added "traitor" to my list of titles in 2007. It was the night before I was to testify before Congress to support closing the egregious carried interest tax loophole.

Now, almost a decade later, this loophole is still open and some of its biggest beneficiaries, such as Schwarzman, probably still believe I am a traitor for my continued campaign to close it.

But the thing is, while a few wealthy elite are calling me a traitor to my class, the rest of a frustrated nation is calling the continued existence of the carried interest tax loophole a fraud on the middle class.

I am not interested in reneging this title of "traitor" with those in the private equity and venture capitalist world who are openly cheating the already beleaguered American people.

The carried interest tax loophole is the result of these fund managers overlaying multiple tax codes to receive a preferential tax rate. The bulk of their earnings is counted as long-term capital gains rather than as ordinary income—a rate that is roughly half what they would be paying for their earnings in any other management job.

Professor Victor Fleischer, who has been a key player in advocating for the closure of the carried interest loophole, and I estimate the annual cost to the U.S. Treasury at around $10 or $12 billion every year, which is a staggering number.

Let's stop and think about this number for a moment. The cost to fix all the lead-ridden pipes in Flint, Michigan, is estimated at $1.5 billion—$10 to $12 billion just once would repair all the municipal water problems in this entire country, but we're talking about $10 to $12 billion every year from closing just this one completely unjustified tax loophole.

A few thousand people—mostly men concentrated in the five states of New York, New Jersey, Connecticut, Massachusetts and California—are exploiting a loophole for their personal gain, rather than abiding by the fair progressive standards upon which our nation's tax code was founded. I myself have benefited from this loophole, and wish I hadn't.

I grew up in a lower-middle-class family. I have been working since I was 9, first as a berry picker, to earn the financial status that I have today. But I was born at a time when the American dream was still alive and still inclusionary—and I was white and male.

Today, the American dream is unattainable for millions of American families and workers. The harsh reality of a tax structure that has tipped more and more in favor of the already wealthy over the last four decades confirms many Americans' belief that the rungs of the economic ladder have been pulled up before it was their turn to climb.

While the carried interest tax loophole may look like just a stress fracture in the system to some, it has become so much more. It has become a poster child of all that is wrong in how Congress is favoring wealthy special interests over the greater good of the people.

It has been a decade since the first calls for closing this loophole sprang forth, yet the stalemate in Congress continues. Though we have the support of members of Congress such as Senator Tammy Baldwin (D-Wis.) and Representative Sander Levin (D-Mich.), and the support of major candidates on both sides of the aisle, those in favor of keeping the loophole alive are still winning.

So last March, I went with a few of my fellow Patriotic Millionaires to Albany, New York, where we advocated on behalf of closing this loophole at least on the state level. The New York State Legislature seems ready to step up, and soon we will take this fight to every level of government across the country.

We are at a breaking point. Middle-class Americans see every day that the wealthy continue to receive unfair tax breaks, and they see inaction rather than reaction.

They are losing faith, and if we can't close down something as egregious and intellectually unsupported as the carried interest loophole, how can we ever get the middle class to fully trust Washington again?

Leo Hindery Jr. is a member of Patriotic Millionaires, co-chair of the Task Force on Jobs Creation, founder of Jobs First 2012 and a member of the Council on Foreign Relations. An investor in media companies, he is the former CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. (TCI) and Liberty Media.