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Private equity tax loophole, take two

Commentator Robert Reich

TEXT OF COMMENTARYBOB MOON: A study out this week finds many investment bankers and plenty of traders stand to see bonuses rise 15 percent from last year on a wave of private equity deals abroad. Some Wall Streeters could see incentive pay rise at least 20 percent. Recently, Marketplace commentator Robert Reich suggested here that the income of private equity partners should be taxed as compensation, meaning at a higher rate and not at the lower rate that capital gains are taxed now. Today, he tells us what kind of reaction he got from that idea.


ROBERT REICH: After suggesting a couple of weeks ago that the stratospheric earnings of equity-fund managers ought to be considered income rather than capital gains and therefore taxed at 35 percent rather than 15 percent, I was deluged with e-mails telling me the plan wouldn't work. It would just drive fund managers into offshore tax havens.

No less than Jon Corzine, the former chief executive of Goldman Sachs, now governor of New Jersey, admitted recently in a television interview that many fund managers would take their money out of the country before they'd pay the 35 percent rate.

Corzine and my other critics may have a point. Congress's Joint Committee on Taxation recently estimated that America's super-rich already sock away more than $100 billion a year in offshore tax havens. So any attempt to get them to pay what they owe is doomed, right?

Maybe. But I've been thinking a lot about the immigration bill now pending before Congress, especially the conditions undocumented workers will have to meet if they want to become American citizens. One of them is to pay all the taxes they owe.

The new immigration bill may not make it through Congress, but that provision about paying taxes that are owed in order to be a citizen serves as a reminder that paying taxes is one of the major obligations of citizenship. After all, if we didn't pay the taxes we owe, we wouldn't have public schools, police and fire protection, national defense, homeland security, roads and bridges, Medicare and Social Security and all the other things we need.

So when the super-rich use offshore tax havens to avoid paying what they owe in taxes, they're reneging on their duties as citizens. It seems only fair to me that the consequence of that kind of tax avoidance ought to be loss of citizenship.

If it's more important to someone to avoid paying what they owe in taxes than to continue being an American, then let them keep their money. They can become a citizen of the Cayman Islands, or Bermuda, or wherever else they store their wealth, and come here on a visitor's visa. If they can get one.

MOON: Former Labor Secretary Robert Reich teaches public policy at the University of California at Berkeley.

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