Should teachers be provided with federal income tax relief?

Posted on 19. Oct, 2011 by Stephan Helgesen in Education

Tax traders, exempt teachers: Close the ‘carried interest’ loophole

A bedrock principle of our society is that we obey laws and follow rules. And one set of laws where voluntary compliance is critical involves the collection of taxes. We currently have the world’s most efficient tax collection system because most Americans scrupulously obey these laws, even as tax rules grow ever more complex.

Our political leaders, however, cannot expect compliance to go on forever when tax unfairness is rampant. This disparity is particularly clear in New York City – where the South Bronx, the poorest urban county in the country, lies just 10 miles from the excess of Wall Street.

One starkly unjust tax provision once again garnering attention – this time as part of President Obama‘s American Jobs Act – is “carried interest.” Since the mid-1980s, the performance-based management income earned by a few thousand extremely wealthy private equity, hedge fund and other money managers has been taxed as capital gains, when all that these managers do is manage money – specifically not their own money – for other people. This management income, in form and substance, is no different from the management income that hundreds of thousands of other managers earn every day from the results of the businesses they oversee.

Yet carried interest alone is taxed as capital gains, while everyone else is taxed on ordinary income. Because the 15% capital gains tax rate is less than half the 35% maximum ordinary income tax rate, the cost to the Treasury is massive. We estimate annual loss of tax revenue from carried interest is at least $10 billion a year, or $100 per American household a year. Our state manages 41% of the world’s hedge fund assets, more than any other city on Earth.

Investment partnership managers say that reforming carried interest would create an “investment tax” of sorts, with dire consequences for the American economy. Yet the consequence would only be to the managers’ incentive fees.

They also claim the annual amount to be collected by changing this tax policy is “only” a couple of billion dollars a year, so the deficit- and debt-closing effect would be minimal. This argument doesn’t properly account for the activities of the more than 1,000 private equity funds, 8,000 to 9,000 hedge funds, 1.2 million real estate limited partnerships and the 1.3 million “other” limited partnerships that each year file with the IRS. It also makes the false assumption that the managers will adjust their behavior to avoid higher taxes, even though carried interest is determined by contract and is therefore immune from so-called “avoidance schemes.”

This has to change, and we believe we have just the way to do it. It is time to convert carried interest into public interest by redirecting this annual $10 billion tax break to people who actually need it, namely America‘s K-12 teachers – some 80,000 of whom work in New York City, the largest public school system in the country.

The $10 billion a year gained from ending the carried interest exemption, in fact, is just about enough to waive the income taxes on those who choose to teach our children – enabling us to give refundable tax credits to K-12 teachers based on their qualifications and teaching specialties, in order to increase the pool of teachers in critically important areas such as languages, math and sciences, and instructing disadvantaged students.

America has a long and successful record of using the tax code to reward desirable social actions. In the 1960s, we gave income tax relief to VISTA and Peace Corps volunteers because their work was deemed so important, and today, we proudly give substantial relief to our courageous active-duty military personnel.

Teachers are just as patriotic and important, and vis-a-vis all other municipal professions they are far and away the most difficult public servants to recruit and retain. New York City’s teachers serve more than a million students in nearly 1,700 schools.  All informed citizens want high teaching standards and accountability. But they also understand the economic plight of our K-12 teachers is a major obstacle when it comes to developing top talent.

Providing federal income tax relief to teachers would be a powerful response to this demand, and an important step toward restoring the health of our national economy and our global competitiveness. Properly taxing carried interest is the means to this end.

This article was submitted by Leo Hindery who is chairman of the Smart Globalization Initiative at the New America Foundation and former chairman of Teach for America. Kerrey, a former U.S. senator from Nebraska and earlier its governor, is president emeritus of the New School and currently executive chairman of Global Scholar in New York City.




Comments are closed.

Bad Behavior has blocked 142 access attempts in the last 7 days.