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Indefensible: Hedge fund tax loophole shows ‘swamp’ still rules over Washington, D.C.

  • White House chief economic advisor Gary Cohn claimed the hedge fund and private equity lobby was too strong to overcome in the battle to cut the carried interest tax loophole.
  • "The reality of this town is that constituency [hedge funds and private equity] has a very large presence in the House and the Senate. They have really strong relationships on both sides of the aisle," he said. "We just didn't have the support on carried interest."
  • Well, that isn't good enough.
President Donald Trump speaks after the U.S. Congress passed sweeping tax overhaul legislation, on the South Lawn of the White House in Washington, December 20, 2017.
Jonathan Ernst | Reuters
President Donald Trump speaks after the U.S. Congress passed sweeping tax overhaul legislation, on the South Lawn of the White House in Washington, December 20, 2017.

White House chief economic advisor Gary Cohn said the administration tried hard to cut a hedge-fund loophole in the tax reform bill, but failed.

Cohn was asked Wednesday what was the one change he would make to the tax plan.

"We would have cut carried interest," he said Wednesday at an Axios event. "We probably tried 25 times."

The advisor blamed resistance on Capitol Hill. "We hit opposition in that big white building with the dome at the other end of Pennsylvania Avenue every time we tried ... It is just the reality of the political system."

Well, that isn't good enough in a budgetary environment where Congress is struggling to fund health care for millions of children in low-income families. It is time for the administration to live up to its promises.

President Donald Trump vowed during his campaign that he would eliminate this loophole, saying hedge-fund managers were "getting away with murder" and he would "drain the swamp" in Washington, D.C.

But Cohn claimed the hedge fund and private equity lobby was too strong to overcome.

"The reality of this town is that constituency [hedge funds and private equity] has a very large presence in the House and the Senate. They have really strong relationships on both sides of the aisle," he said. "We just didn't have the support on carried interest."

The Republican tax plan keeps the so-called carried-interest loophole that benefits managers of hedge funds and private equity funds. Carried interest is the money manager's cut of the fund's profit. It is taxed at the lower capital gains tax rate of approximately 24 percent, while profit in other professions is taxed at the higher ordinary income top rate of nearly 40 percent.

The Congressional Budget Office has estimated the loophole costs taxpayers more than $17 billion over a decade.

Even the biggest names in finance find it ridiculous.

Billionaire Stanley Druckenmiller, a legendary hedge-fund manager himself, told CNBC on Dec. 12 he is outraged over the carried interest tax advantage.

"First of all, the billionaires lobbying the congressmen for this ought to be ashamed of themselves because we're asking doctors and lawyers and other Americans in blue states to take tax increases so we can fund this kind of nonsense," he said. "You have these multi, multibillionaires — with carve-outs — let's be clear. Carried interest ... you're making money on somebody else's capital. It's not on your own. If that's not income, I don't know what is."

Warren Buffett also blasted the loophole in an August 2011 New York Times op-ed.

"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as carried interest," he wrote. "These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species."

Cohn, formerly the No. 2 executive at Goldman Sachs, claimed Trump was exasperated over the loophole remaining in the bill as recently as this week.

"We had a conversation on carried interest [on] Monday," Cohn said. "He wanted to know if we can take it out of the bill. He said, 'How does this keep surviving?'"

But if the administration really cared enough and were willing to publicly shine a spotlight on the specific congressmen defending the loophole, there is no doubt this provision could have been voted out.

— CNBC's Liz Moyer contributed to this report.