Grover Norquist has bigger taxes to fry.

Photographer: NICHOLAS KAMM/AFP/Getty Images

Sure, Debate Carried-Interest Taxes. Or Something That Matters.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”
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Whatever you think about Grover Norquist, this anti-tax crusader is right about one thing: “Carried interest doesn’t matter.”

Oh, it matters politically. It's fundraising gold for Democrats, and a perennial talking point for liberal columnists: hedge funders pay taxes on some of their income at the lower rate for capital gains, rather than the higher rates assessed on “ordinary income” (read: money you earn by working).

Wonks can have hours of fun arguing over whether this is a just way to equalize tax treatment of “sweat equity” and investment capital in partnerships, or a “loophole” that lets rich hedge fund managers pay too little in tax. But in terms of its actual impact on the economy, or the average American, the carried interest ranks well below the burning question of whether the golden age of the cable television drama is sustainable

Even if we agree that it is an egregious loophole, closing it will raise something like 0.05% of the federal budget. Small wonder that Norquist is willing to trade it for a tax reform that lowers income tax rates for corporations and top earners. Frankly, he should be willing to trade it for a better parking space when he visits Capitol Hill.

(Update: Norquist later clarified that "on principle," he supports the current, lower tax rate for carried interest.) 

Why then, do so many people know about the tax treatment of carried interest? Because it is the epitome of a Washington Issue. A Washington Issue is something that sounds terrible, has little meaningful impact on more than a handful of people, and most importantly, allows you to pretend that you are addressing a different, very difficult issue that would impact a large number of people if you actually tried to make meaningful change -- people who might get angry and do something rash, such as voting for your opponent.

The carried interest issue is thus a convenient way for Democrats making stump speeches to claim that they’re really going to do something about inequality and cronyism, and maybe fund some important new spending on hard-working American families. With the entrance of Jeb Bush and Donald Trump into the arena, it is also a way for Republicans to seem tough on rich special interests while simultaneously proposing tax plans that will help affluent Americans hold on to a lot more of their income and wealth.

As with most Washington Issues, my actual level of concern about carried-interest taxation hovers somewhere between “neighbor’s bathroom grout drama” and “Menudo reunion tour.” Nonetheless, I’m beginning to wish that Congress would get rid of it without demanding anything in return, just to force politicians to talk about something that actually matters. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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