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Taxing Private Equity And The "Dawn" of Political Capital

Welcome to Political Capital. If you’ve seen me on TV you know that my business is politics. And in one way or another, politics is everyone’s business. It sometimes looks like a game, but the outcome shapes the taxes you pay and the rules of the road for economic competition--in the U.S., and around the world.

Here at Political Capital, I’ll take you behind the headlines to offer my take on events and issues facing Congress, the White House, and the key places in the 2008 race for the presidency. From Washington or the campaign trail, I’ll explain what’s happening--and why.

Let’s get started.

Republican Candidates
AP
Republican Candidates

One of the hottest debates in Washington right now involves taxation of private equity and hedge fund managers. Much of their income now gets tax as “carried interest” at the 15% capital gains rate, instead of the 35% top personal income tax rate. To the alarm of some on Wall Street, powerful Democrats on Capitol Hill are trying to change that.

The early contours of the debate suggest the familiar Bush-era debate; Democrats complain about Republicans favoring “the rich,” Republicans crying “class warfare,” and President Bush holding enough clout to win.

But the balance of power this year is different--and not just because Bush now has much less clout and Democrats have far more. It’s a dangerous debate for Wall Street executives because public opinion has drifted away from them.

A Pew Research Center study of American attitudes toward wealth and poverty shows why. During the 1990s boom, the proportion of people who believe “the rich just get richer while the poor get poorer” fell. But now it’s rising again to 73% of all Americans.

Even more striking, it’s rising most among the highest-income earners. That helps explains why no less than Warren Buffett was complaining about tax inequities at a fund-raiser for Hillary Clinton last night. For Wall Street, winning this debate won’t be easy.

Questions? Comments? Write to politicalcapital@cnbc.com.