Schumer Wall Street Backers Targeted in Tax Fairness Debate

The Democratic Party’s tax-fairness campaign theme pits Senator Chuck Schumer of New York, among the chief architects of that message, against some of his most influential constituents and top campaign donors.

Democrats are renewing their bid to end the carried interest tax break for private-equity managers after Republican presidential candidate Mitt Romney’s 2010 return, released last month, showed he used it to help limit his effective tax rate to 13.9 percent. The line of attack may be uncomfortable for Schumer as Wall Street leaders have been top contributors to his re-election and fundraising efforts, said Rogan Kersh, a public policy professor and lobbying expert at New York University.

“If Schumer were a rookie or somebody not experienced in this kind of politics you’d think this might be his undoing,” Kersh said. “It’s awkward for Schumer.” Even so, Kersh said, “he knows how to play this game. He’s been doing it for years.”

Schumer, the U.S. Senate’s third-ranking Democrat, is a leading voice for his party heading into the November election, pledging to “focus like a laser on the middle class.” A third-term senator, he serves on the Finance Committee, which has authority over tax policy. Schumer shepherds his party’s messaging on a range of issues including economic stimulus and election themes that square off with the Republican Party.

Chief Contributor

The securities and investment industry, through its employees, has been the chief contributor to Schumer’s re-election efforts, directing $2.7 million to his campaigns from 2007 to 2012, according to the Center for Responsive Politics in Washington, which tracks campaign spending. The industries are concentrated in New York.

During that period, hedge-fund sponsor Paulson and Co. was the second-largest contributor to Schumer with $137,300. The biggest was Paul, Weiss, Rifkind and Garrison LLP with $145,550; New York-based Blackstone Group LP came in eighth, with $68,000 in contributions.

Schumer declined, through his spokesman, Brian Fallon, to be interviewed on the tax treatment of carried interest.

In 2008, when Schumer was head of the Democratic Senatorial Campaign Committee, he raised $14.8 million from securities and investment firms for his party’s candidates, according to the center.

Wall Street Focus

“He has been, if not the senator from Wall Street, at least a senior New York senator who pays close attention to the finance industry,” Kersh said.

The debate is over so-called carried interest, the profits-based compensation that private-equity managers, real estate investors and members of oil and gas partnerships often receive. They get a portion of their clients’ earnings as investment income if the underlying earnings are treated that way.

Managers receive management fees and carried interest, which often is a 20 percent share of the profits earned by the fund. The management fees are taxed as ordinary income, with a top rate of 35 percent, while carried interest is generally considered a capital gain taxed at a top rate of 15 percent.

President Barack Obama and congressional Democrats have called carried interest compensation for work, which they say should be viewed like wages for tax purposes and taxed at ordinary income rates of up to 35 percent.

In 2010, $7.4 million of Romney’s $21.6 million in income was in the form of carried interest, his campaign said. It was taxed at the capital gains rate.

Discouraging Investment

Republicans say changing the tax treatment of carried interest would discourage investment, while Democrats cite Romney as a symbol of preferential treatment, and unfairness, in the U.S. tax code.

During a Feb. 1 news conference, Senator Al Franken cited donations to Romney from New York hedge-fund managers Robert Mercer, co-chief executive officer of Renaissance Technologies, and Julian Robertson, founder of Tiger Management LLC, as examples of the influence of money in politics. They each donated $1 million to Restore Our Future, a so-called super-political action committee dedicated to electing Romney, in the past six months, according to Federal Election Commission data.

Schumer stood silently to Franken’s right as the Minnesota Democrat called the contributions a “bargain” for financiers who expect Romney to protect their preferential tax treatment.

Schumer, when asked later about his position on the issue, said he has long supported taxing carried interest as ordinary income. “I’ve taken that position for years,” he said. “I have voted for raising it to 35 percent. It’s the right thing to do.”

Schumer has balanced the donors’ interests against the politics of his party, sometimes warning against a tax increase while never directly opposing one during congressional votes.

‘Complicates Things’

“It complicates things for him in that the Republican nominee has taken such advantage of this provision,” said Greg Valliere, chief political strategist at the Potomac Research Group in Washington. “It’s always been an area Schumer has shied away from.”

Schumer’s efforts to support his upper-income constituents were on display during a recent congressional hearing. He implored U.S. Treasury Secretary Timothy Geithner to support capping deductions and extending the 2001 and 2003 income tax cuts for U.S. households earning more than $1 million instead of the $250,000 Obama has proposed. “Why don’t we all move to the nice $1 million,” he said during a Feb. 14 meeting of the Senate Finance Committee.

New York Interests

In July 2007, before the collapse of U.S. financial institutions, Schumer said changing the tax treatment of carried interest could compromise U.S. competitiveness.

The U.S. “shouldn’t do anything” to “make it easier for capital and ideas to flow to London or anywhere else,” Schumer said at a Finance Committee hearing. “I will fight as hard as I can to protect the interests of New York, and ensure that it remains the pre-eminent financial center in the world.”

The senator has long supported raising the tax rate for carried interest as long as other industries besides private equity are treated the same way, said Jeff Hamond, Schumer’s former economic policy director.

“He felt like they shouldn’t be picking just on New York,” Hamond said in an interview.

Schumer has said the increased tax on carried interest should also be applied to partnerships in the oil and gas industry.

Lobbying Deluge

NYU’s Kersh said that broadening the industries on this issue would cause a lobbying deluge and kill prospects for carried-interest legislation. “You just spread the field of battle and that tends to make the issue go away,” he said.

Growing income inequality and the view among some Democrats and executives that the middle class is shrinking have changed the politics of the carried interest issue, said John Mercurio, a New York Democratic political strategist who has worked on a number of congressional and presidential campaigns.

“The problem is that extreme, that he really needs to be doing this,” he said. “A lot of progressive liberal people, not just Warren Buffett and Bill Gates, but rank-and-file rich people also feel it’s important,” said Mercurio, whose clients also receive contributions from private equity managers.

An October 2011 Congressional Budget Office study found income for the top-earning 1 percent of U.S. households rose 275 percent over the past three decades. For the 60 percent of households in the middle of the income scale, growth in average after-tax household income was just less than 40 percent.

Between 2005 and 2007, the after-tax income received by the 20 percent of the population with the highest income exceeded the after-tax income of the remaining 80 percent, the CBO found.

Democratic Legislation

Democrats have repeatedly tried to pass legislation to tax carried interest at ordinary income rates.

Obama’s 2013 budget proposal would raise $13 billion over a decade by taxing the income of hedge-fund managers and private equity partners at ordinary income rates. Obama also wants to impose a 30 percent minimum tax for individuals with annual incomes of at least $1 million, a rule named after billionaire investor Warren Buffett, who originated the idea.

Representative Sander Levin, a Michigan Democrat, on Feb. 14 introduced a measure to raise taxes on carried interest, similar to a measure he proposed in 2007.

During a Jan. 25 news conference, Senate Majority Leader Harry Reid cited Romney’s tax records as the impetus for addressing carried interest. “That pretty well indicates why it’s become an emergency,” the Nevada Democrat said.

Earlier at the same event, Schumer outlined his party’s tax priorities, making no mention of carried interest. He cited eliminating some corporate tax breaks, letting the 2001 and 2003 tax cuts for upper-income earners lapse and creating tax incentives for companies that add jobs in the U.S.

“When Republicans say tax reform, it’s often code words for simply reducing taxes on the wealthy,” Schumer said. “It’s a priority for us to act on some kind of Romney -- I mean, Buffett -- rule.”