Photo illustration of Donald Trump and Hillary Clinton debate tax issues – illustration of them looking at pie cut in pieces
Photo illustration by Sarina Finkelstein for MONEY; Getty Images (2); Reuters (1)

Sadly, the Debate's Biggest Economic Point Was Over a Tax Loophole Affecting 2,000 People

Oct 10, 2016

There was scant discussion in the second presidential debate on the topic that most concerns the American electorate: the economy.

And what little that was discussed focused on an en vogue tax loophole called "carried interest," which gained slight fame during the 2012 presidential election thanks to Mitt Romney's personal finances.

Given the attention Donald Trump and Hillary Clinton gave the loophole tonight, you might believe that those two words are the most consequential for the future of our economy. You'd be wrong.
What is carried interest?

Simply put, carried interest allows certain hedge fund and private equity managers to count their share of their fund's profits as long-term capital gains — rather than ordinary income — thereby lowering their tax bill.

The highest tax rate on income currently stands at 43.4% — or 39.6% plus the 3.8% surtax levied as part of the Affordable Care Act. Yet long-term capital gains are taxed at a maximum rate of just 20% before the 3.8% Obamacare surtax on investment income is tacked on.

Roughly 2,000 American taxpayers — mostly men — take advantage of carried interest, which costs the government around $10 billion annually.

Both Clinton ("I've been in favor of getting rid of carried interest for years") and Trump ("one thing I would do is get rid of carried interest") said they would eliminate the loophole and tax those dollars as ordinary income.

However, the Tax Policy Center notes that even if Trump were to eliminate the carried interest loophole, profits earned by certain hedge fund managers might wind up being taxed at an even lower rate under his comprehensive tax plan. That's because "the entities that earn carried interest income are organized as partnerships," the Tax Policy Center points out. And under Trump's plan, "that income would be taxed at a top rate of 15 percent, a reduction of more than one-third."

Is carried interest a big issue facing the economy?

To be blunt: an esoteric tax arrangement that affects fewer people than years in the common era is not the most pressing issue facing the world's largest economy.

While a substantive economic conversation can be difficult to achieve while one participant continually interrupts his female opponent, it is still vital nonetheless. Voters deserve to listen to the candidates debate policies to help enrich their lives.

For instance, the second presidential debate could have used a fuller discussion of the following pocketbook issues:

  • How would you lift middle-class incomes, which are still below 1999 levels?
  • Is the Federal Reserve correct to keep short-term borrowing rates at near-historic lows?
  • Are you more concerned with too much inflation, or too little?
  • How do you plan to deal with the unprecedented levels of student loan debt and lower college costs for future students?
  • What is the appropriate length of paid parental leave, and should fathers be entitled to leave as well as mothers?
  • Should Social Security benefits be increased, or pared?

And a hundred others.

Of course this is no normal election. The two days leading up to this debate were filled with the fallout of Trump boasting about being able to grope women due to his star status in an 11-year-old video that was leaked to The Washington Post.

And during the debate, Trump said that if he wins, he would direct his attorney general to file charges against Clinton.

Nevertheless, one of these two candidates will be elected to lead the country. And the third debate must address issues other than carried interest.

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