General executive partners of long-term investment partnerships, including investments in real estate, venture capital, private equity, and other investments, are paid a management fee based on the assets they are managing, plus a share of the capital gains (typically 20 percent) earned on the investment. The management fee is taxed as traditional income, but the the limited (passive) partners pay the general partner a share of the profit—called “carried interest”—as an incentive for the general partner to maximize investment performance, which is taxed at the 15 percent capital gains rate, much lower than the individual income tax rate.

This rate is already scheduled to increase to 20 percent in 2011, but the American Jobs and Closing Tax Loopholes Act, which passed the House yesterday by a vote of 215 to 204, would tax three-fourths of carried interest profits at the regular individual income rate, up to 38.5 percent.

This proposal, as the Wall Street Journal’s John Rutledge points out, is the latest consequence of a Washington mentality that focuses on who is taxed rather than what activities are taxed. The rate hike would of course reduce income for investors; this includes both general and limited partners, since the latter would have to pay a greater share of their after-tax returns to compensate the general partners. But even if one accepts the political and moral legitimacy of a government playing the role of Robin Hood, robbing from the rich to give to the poor, the policy would have adverse consequences for the economy as a whole, including poor and middle-class citizens.

Rutledge explains that the law would “discourage capital investment, increase the cost of money to start and grow a business, and depress real estate and stock prices.” Reduced after-tax returns on investment diminishes investors’ willingness to take risks, which is especially true in this case since long-term investments do not begin generating profits for years after the initial investment. This makes it more difficult for small businesses to acquire the capital needed to establish themselves and expand, which in turn means fewer jobs. The diminished value of after-tax returns on assets would drag down asset prices. As Rutledge notes, “The direction of these changes is not in question.” The only question pertains to their magnitude.

Given that partnerships are America’s “primary vehicle for funding long-term investments,” the decline in such investment is likely to be substantial. Rutledge cites the most recent Treasury Department data, which indicate that there were more than three million partnerships, representing 18.5 million investor partners, in 2007. Altogether, the 2.3 million partnerships required to report their asset balances to the IRS financed $20.5 trillion in investments that year.

There is reason to believe, moreover, that net revenues would actually decline as a result of investment reduction. As ABC’s Charlie Gibson noted in an April 2008 debate between Senators Barack Obama and Hillary Clinton, President Clinton signed legislation in 1997 reducing the capital gains tax rate to 20 percent, and President Bush subsequently reduced it to 15 percent; in each instance, when the rate dropped, revenues from the tax increased. When the rate had been increased to 28 percent in the 1980s, revenues went down. In a sound bite that never ceases to amaze me, then-candidate Obama said he would “look at” raising the capital gains tax in spite of this “for purposes of fairness.” He then reverted to his usual class-warfare rhetoric, noting the unfairness of an economy that allows the top 50 hedge fund managers to earn $29 billion in 2007. The President and House Democrats are apparently so determined to punish the rich that they will do so even if it means less jobs and capital formation, and has resulted in reduced revenues in the past.

Incidentally, yesterday’s vote to raise taxes on carried interest was partly sold as a tax on wealthy hedge-fund managers, but Rutledge notes that such funds generate short-term capital gains, and their managers already pay taxes at ordinary income rates. The tax will instead affect those who make the long-term investments that generate long-term capital gains.

The ostensible purpose of this provision, other than to redistribute wealth, is to partially offset extensions of various tax credits (despite aforementioned evidence that this could reduce revenues, and despite the name of the bill itself). A few of the most egregious of these, the vast majority of which, as Tax Foundation president Scott A. Hodge has noted, amount to earmarked spending through the tax code, are catalogued on the Tax Foundation’s Tax Policy Weblog. The current Congress, of course, has already substantially increased spending, much of which is permanent and likely to easily outlast the current economic downturn. In the majority party’s mind, tax revenues must be vigorously maintained, but the same standard does not seem to apply to spending.

The good news is that the bill is unlikely to pass in its current form due to serious concerns in the Senate. Sen. John Kerry (D., Mass.), for example, has expressed strong reservations about the provision, likely because of the venture capital community in Massachusetts. Still, the fact that such a proposal is even being considered speaks volumes about the current Congress’s idea of fiscal policy.

Photo Credit: Wikipedia

Now I expected you to find fault with Rand Paul’s lukewarm remarks on the Civil Rights Act of 1964, as I did. But why stretch your case, and your credibility with readers, by asserting that he is a racist? I think the charge of racism reflects an extreme and ultimately untenable view of what constitutes racism, and what separates racism from legitimate political disagreement based on underlying principles. This part of your post, in which you criticize “conservatives” and “over-polite liberals,” is especially puzzling to me:

But if we can’t say it’s racist to oppose the de-institutionalization of racism, then we’re pretty much saying that you’re only racist if you wear a white hood,” this is what I meant. If racism is a “stain on the soul,” then almost nobody can be accused of being a racist, because we can’t reliably look into people’s souls.

If racism is solely or even mainly defined as an action, then the Oxford English Dictionary must be written by “conservatives” and “a fair number of over-polite liberals,” because it primarily defines ”racism” as a belief. (For that matter, Wikipedia too.) Here are both OED definitions for racism:

  • noun 1 the belief that there are characteristics, abilities, or qualities specific to each race. 2 discrimination against or antagonism towards other races.

Those Brits do always strike me as a tad over-polite. But regardless of the primary definition, do you at least acknowledge that there are principles at stake in government efforts to curb racial discrimination? That it is possible to oppose a policy intended to reduce racial discrimination without being racist? Can’t you oppose racial discrimination, and support racial equality of opportunity, but still have legitimate qualms about State coercion of voluntary associations, individuals, and businesses? Suppose the government could reduce racial discrimination by instituting some kind of mandatory racial sensitivity training. Clearly it is not racist to find fault with such a policy.

And surely you do not agree with Press Secretary Robert Gibbs when he says that a discussion of the principles underlying an act of Congress has “no place in our political dialogue.” 

If I had to speculate, I’d say that Rand Paul probably has a deep commitment to libertarian principles, if not a deeply nuanced understanding of how something like the Civil Rights Act might be consistent with Nozickian theory or the writings of Julian Sanchez, and felt that he might risk infidelity to some of these principles by endorsing every provision of the Civil Rights Act without any hesitation. It’s  not as juicy a story, but I think you really need to have near-zero confidence in Rand Paul as a man of some principle, or a warped understanding of racism, to conclude that his remarks or his libertarian views are racis.

Finally, for what it’s worth, you say in your original post that he is “against the Civil Rights Act,” which is not really accurate; his statements then and now indicate the rather different conclusion that he is not unequivocally for every provision of the Civil Rights Act. His official position is that he supports the Act, and would have supported it at the time. This might be nitpicking, but since you phrased the title that way specifically to prompt a response like this, I couldn’t help but take the bait.

I certainly did not celebrate Chris Christie’s victory last fall. And his governance so far has been exactly what I feared. He’s actually trying to do what he campaigned on: make huge cuts to public schools, higher education, hospitals, and other public services that people rely on. But there’s a certain honesty and virtue in that: we elected him, and we should have known what we were getting.

And I find his long, frustrated comeback to a reporter’s asinine process-oriented question kind of refreshing. I do think it seems a little rehearsed. I mean it’s just too good, I have a hard time imagining he came up with it on the spot. The one-liner about Corzine definitely sounds planned. But still, I’m glad to see a politician show a little life, a little personality. And it’s a very New Jersey personality at that. I can see this episode giving the Governor a little boost: his poll numbers have nowhere to go but up.

Watch it here.

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The Death of Conservatism, by Sam Tanenhaus, Random House, 2009.  $17, 144 pp.

In 1962, legendary ABC News anchor Howard Smith ran an hour-long segment titled “The Political Obituary of Richard Nixon.” Smith proclaimed Nixon, who had just lost the race for Governor of California only two years after narrowly losing the 1960 Presidential election to John F. Kennedy, to be politically finished. Six years later Nixon would capture the White House.

American politics is lit with these stories of self-reinvention and political turnarounds, yet Sam Tanenhaus, in The Death of Conservatism, decrees a political obituary for the entire conservative movement. Tanenhaus, who has once called himself “a chastened liberal,” traces the conservative movement from its roots in Edmund Burke to its modern leaders like William Buckley Jr. and Ronald Reagan, and finally its death: the 2008 presidential election. Ultimately, Tanenhaus’s obituary comes much too soon, and proclaims an end to a movement that is very much alive.

Whither Conservatism?

The book follows from an essay Tanenhaus wrote in The New Republic in the aftermath of Barack Obama’s election, and it is the ascendancy of Barack Obama which overshadows the author’s argument. Obama’s victory, Tanenhaus argues, was not so much a positive referendum on liberal ideology as it was a negative referendum on eight years of the Bush administration. “During two terms of George W. Bush,” he writes, “conservative ideas were not merely tested but also pursued with dogmatic fixity.” Tanenhaus holds up the resounding failure of the Bush administration and its policies, as evidence of conservatism’s demise and rejects the role of a new liberal energy in that election.

Tanenhaus’s definition of conservatism is central to his concise book. Tanenhaus divides conservatism into two groups: ‘revanchist’ conservatives and realist conservatives. Revanchist conservatism is rooted in the politics of revenge and extremism, and the author argues that this wing of conservatism has overtaken the realist wing and suffocated true conservative principles.  The issue arising from this division of conservatism is that Tanenhaus lumps the Bush years among the revanchist aspect of the party. Yet Bush was seen in the conservative wing of the party as an ideological betrayer, especially on the growth of government and deficits and immigration.

Looking Ahead

“In each instance [of conservative losses], crushing defeat gave the movement new strength and pushed it further along the route to ultimate victory,” Tanenhaus writes. “Today it is impossible to make this case.” The future Tanenhaus sees for the conservative movement is a bleak one, in which the intellectual base of the party, found in “journals like Commentary, National Review, and The Weekly Standard,” slowly deteriorates until it becomes a “mouthpiece of the Republican Party at its most revanchist.” For Tanenhaus, editor of the New York Times Book Review and the New York Times Week in Review, this claim is all too predictable, and his critiques of his conservative counterparts sound far more partisan than analytic, often relying on finger-pointing at conservative celebrities such as Rush Limbaugh.

“Today’s conservatives resemble the exhumed figures of Pompeii,” Tanenhaus writes, “trapped in postures of frozen flight, clenched in the rigor mortis of a defunct ideology.” This grandiose statement is typical of Tanenhaus’s literary flair -but today’s conservative landscape is no Pompeii. Although conservatism has paled next to the energized progressivism of Obama, it is far from the ghastly death Tanenhaus diagnoses.  A quick examination of conservative leaders today finds plenty of vital signs. Tim Pawlenty remains a popular conservative, while Rudy Giuliani and Mitt Romney are considered among the leaders of the Republican Party despite their heterodoxies on key ideological points like abortion. The conservative movement today is more steeped in realism and compromise than Tanenhaus acknowledges.

Tanenhaus is not entirely off-base. The uncompromising extremism of the Bush administration, rooted in men like Dick Cheney, John Bolton and John Ashcroft, and a hard-line neoconservative foreign policy, has certainly passed, and perhaps this is the obituary Tanenhaus meant to write. But the movement itself is still alive, and will continue to be for quite some time. Movements and leaders are never finished in America-they are just waiting to make a comeback.

And as for Mr. Spontaneous himself? If the whole Congress thing doesn’t pan out, he may have a career ahead of him as a Democratic fundraiser.

But I may have been too generous. Repetition belies intent. Sarah Palin has repeated this backwards line multiple times. She told Katie Couric that she will not “solely blame all of man’s activities on changes in climate.” And it’s not that she doesn’t know better; a few weeks earlier, with Charlie Gibson, she got the causal relationship right, and expressed doubt about whether climate change is “wholly caused by man’s activities.” Why the change?

We are left with a couple of choices: Either we leap to the judgment that Gov. Palin thinks it necessary to refute the view that every human activity is caused by our changing climate, or we conclude that her causal mish-mash is a politically calculated formulation. The former conclusion would lead us to question Palin’s sanity: Nobody has ever expressed the belief that rising global temperatures cause people to do everything that they do. But if we must settle on the political interpretation of her words, we also have to figure out their political motivation.

My best guess is that her construction is designed to make her appear nuanced to the casual observer. By setting up and then ably destroying this straw-man, Palin comes off as reasonable, at least to people who don’t notice her switcheroo. She sets up an extreme position (the words “all” and “every” are important, suggesting that her fake opponents paint with too broad a brush) and knocks it down.

But there’s more to it than that. Sarah Palin can’t say outright, as she did in August, that she won’t “attribute [global warming] to being man-made.” John McCain’s energy policy, particularly his cap-and-trade proposal, is predicated on the assumption that people are causing global warming and that changing people’s behavior can help fix it. If Palin denied the premise, she couldn’t reach the conclusion. So instead of denying the premise outright, she suggests that “it doesn’t matter” what causes global warming, and that we can do things to alleviate it “regardless” of what started it.

This formulation sounds moderate and practical to the layperson; Palin appears to be cutting through the things that might divide us (the causes of global warming) and is getting at the solutions. Palin’s suggestion that other things, like nature, might be causing global warming sounds judicious to Americans who are not completely sold either way. (Gallup shows that 58% consider it man-made, while 38% don’t.)

But, as Jon Stewart indignantly pointed out, it matters what caused it! Palin is trying to have it every way: She’s trying to sound reasonable next to the imaginary lunatics who allege that every human activity is caused by global warming, she’s trying to sound moderate next to those who insist that it’s man-made, and she’s trying to sound pragmatic in insisting that “it doesn’t matter” what caused it. But her position, just like her phrasing, is completely incoherent. Either we caused it and can fix it, or we didn’t and we can’t. Palin’s response is not “measured,” as ABC News put it. It’s calculated.

-Sam Barr