A Millionaire Takes on the Carried Interest Tax Break

For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Kaustuv Basu

Oct. 13 — Morris Pearl once worked as a managing director of BlackRock Inc., the world's largest asset management firm.

In a Wall Street career spanning more than two decades, he was employed by companies such as UBS AG and Salomon Brothers Inc.

These days, Pearl inhabits a different planet. He is the chair of the Patriotic Millionaires, a group of wealthy individuals campaigning for political equality, a livable wage for working Americans and legislation requiring that the rich and corporations pay more in taxes.

The tax break enables private equity and managers to pay a capital gains tax rate that could be as low as 23.8 percent on their share of profits, which is typically 20 percent of a fund’s profits. The top rate for wages and ordinary income is 39.6 percent.

Pearl, a Democrat, said the tax break is an example of an egregious tax loophole.

The group’s campaign has fresh legs this election season. Presidential candidates Hillary Clinton and Donald Trump have said they want to eliminate the tax break, most recently during the second debate in St. Louis, Mo.

And Victor Fleischer, a tax-law professor who has probably done the most to focus attention on carried interest, is now one of the chief tax counsels to Senate Finance Committee Democrats. It was Fleischer who wrote a 2008 paper called “Two and Twenty: Taxing Partnership Profits in Private Equity Funds” that drew political attention to the tax break.

A Clean Break

When Pearl worked in the financial world, he designed computer software to help connect homeowners to capital markets, lowering the cost of mortgages.

He also advised the governments of the U.S., U.K. and Greece on bank bailouts.

One day in 2013, as he was advising the Greek government on a bank bailout, he saw a group of protesters marching toward the country’s parliament. Many in Greece were angry about austerity measures.

Pearl thought that perhaps the top bank brass and much of the population didn’t necessarily have the same interests.

Eventually, Pearl said, there were a lot of smart computer experts in the financial markets. “I just decided that I had done as much as I could for the companies that I worked for,” he said.

But he still wanted to be influential.

Pearl was interested in public policy. And he knew Erica Payne of the Patriotic Millionaires, whom he met at a monthly breakfast she organized where some of New York City’s movers and shakers would gather to hear a politician or an elected official speak.

They talked in 2014, and soon Pearl was ready to make the switch.

Payne wears many hats—she founded the Agenda Project, a liberal nonprofit political group and is the chief strategist at Patriotic Millionaires. She is the author of a book called “The Practical Progressive: How to Build a 21st Century Political Movement.”

Pearl was the kind of millionaire she had in mind when she started building the group, Payne said.

“One of the things Morris has always said about the people who work with us is that he’s never worked with anyone before now who didn’t care about money,” Payne said in an e-mail. “People who work for us just aren’t motivated by that.”

The group now numbers about 200. They include Lawrence Lessig, a professor at Harvard Law School and founder of Stanford Law School’s Center for Internet and Society. Lessig is the founder of Mayday PAC, a crowdfunded political action committee “to end all Super PACs.”

George Zimmer, the founder and former chief executive officer and chairman of Men’s Wearhouse who is known for his appearance in television advertisements where he tells viewers “You’re going to like the way you look,” is another member.

A Nonintuitive Thing

Pearl said he is sometimes met with disbelief when he talks about the Patriotic Millionaires.

“It is seen as a nonintuitive thing—rich people promoting equality,” Pearl said. “That is seen as crazy, absurd and irrational.”

Pearl sees it as completely rational.

He appeared on Jon Stewart’s “The Daily Show” in 2015, telling correspondent Hasan Minhaj that he wanted fair taxation where “those who have more, pay more, those who have less, pay less.”

“What? But don’t you need more money?” Minhaj asked in a mock-aghast tone.

“No, I don’t. I do not need more money,” Pearl said.

When Minhaj asked about his net worth, Pearl said he is confident that he and his wife, Barbara, can live well off their investments.

This summer, Pearl attended both the Democratic and Republican political conventions.

He stood in a public square at the Republican National Convention in Cleveland along with John Pudner, executive director of Take Back Our Republic, a conservative group, to speak against the influence of money in politics.

Pudner, in many ways, is the political opposite of Pearl. He has written for the right-wing website Breitbart.com and was a political consultant to Rep. Dave Brat (R-Va.), who beat then-House Majority Leader Eric Cantor in the Republican primary in 2014 before winning the general election.

But Pearl and Pudner share a common goal—reducing the influence of money in politics. “Even though I’m certainly very conservative, and a lot more conservative than him on tax issues in general, we do agree on the fact that we don’t want donors getting special tax breaks,” Pudner said.

Action in Congress

In April, Pearl wrote to congressional leaders pressing them for a vote on a measure to end the carried interest tax break.

“Because there is absolutely no intellectually plausible reason for this loophole to exist, we must conclude that the continuation of this preferential tax status is the result of millions of dollars of campaign contributions,” Pearl wrote.

The measures (H.R. 2889, S. 1686) sponsored by Ways and Means ranking member Sander M. Levin (D-Mich.) and Sen. Tammy Baldwin (D-Wis.) would raise an additional $15.6 billion over 10 years, according to the Joint Committee on Taxation.

Fleischer estimated in a June 2015 New York Times article that taxing carried interest at ordinary income tax rates would generate about $180 billion in revenue over a decade.

A spokesman for the American Investment Council, a private-equity lobbying group, declined to comment on the Patriotic Millionaires.

The spokesman said that carried interest is appropriately taxed at the long-term capital gains rate, and he did not didn’t anticipate that changing. “The overwhelming majority of Republicans in both the Senate and the House and some Democrats are supportive of the current tax treatment of carried interest,” he said.

In 2015, the group—then known as the Private Equity Growth Capital Council—sent a letter to Sens. Orrin G. Hatch (R-Utah) and Ron Wyden (D-Ore.), among others, saying that the tax rate on carried interest should be similar to capital gains taxes.

Pearl marked up the letter on the organization’s website, saying that the capital gains rate shouldn’t apply to carried interest income because fund managers aren’t investing their personal money.

A Senate Republican aide said that if the goal of the Patriotic Millionaires is to raise the taxation of higher-income people, they would have to do a lot more than just deal with carried interest.

“There is a lot going on in terms of other tax preferences,” the aide said, adding it might be easier to deal with it as part of a broader tax overhaul.

Grover Norquist, president of Americans for Tax Reform, a group that opposes tax increases, said his path intersected with the millionaires group when members came and talked at the “Wednesday Meeting”—a weekly gathering of conservative leaders in Washington that Norquist started.

Norquist said millionaires are free to give more money to the government in taxes when they file their income tax returns.

He said that taking on carried interest might be an effort to open the door to raising the tax on capital gains. A spokeswoman for the Patriotic Millionaires said the group hasn’t taken a position on capital gains taxes outside of carried interest.

The Future

Pearl said the carried interest issue will most likely become a bargaining chip in bigger discussions about a tax overhaul.

He said the Republicans might be willing to trade off on carried interest if they get something in return.

Pearl said the impression he got from talking with Republican staffers on Capitol Hill was that “if we get lowering of taxes for the rich people, we could get rid of this loophole as part of a comprehensive deal.”

Norquist said the treatment of carried interest could be tackled as part of a tax overhaul package that is revenue neutral. “That’s what Trump wants to do,” Norquist said. “It could be if there was a Trump-Paul Ryan tax reform. It is unlikely to, it is not that big a deal—but that’s the only way it happens.”

There also has been talk, most notably from Fleischer, that the Obama administration could take executive action to end carried interest. But the Treasury Department said that Congress is best positioned to work on the issue.

Pearl remains hopeful, pointing to what Trump and Clinton have said.

“There is a glimmer of hope. Our influence is giving our side more political space to do what they want to do without getting as much pushback,” Pearl said. “I think that is kind of our function.”

To contact the reporter on this story: Kaustuv Basu in Washington at kbasu@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.