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Politics

Since ’12 election, drive to end tax loophole fizzled out

No serious attempt to halt benefit for investors despite campaign rhetoric

WASHINGTON — Democrats eagerly stoked outrage during the 2012 presidential election over millionaire Republican Mitt Romney’s low effective tax rate of 14 percent. Did Romney, they suggested, benefit from a special tax loophole for hedge fund and private equity investors, so “fat cats’’ like him can pay taxes at a much lower rate than many regular Americans?

The issue was simple in its appeal to populist anger.

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But a year later, the heated rhetoric of campaign season has fizzled. Concerted initiatives from the White House and Democrats in Congress to close the loophole have not materialized. The “carried interest” loophole — which allows some fund managers to pay taxes at the rate for investments, now 20 percent, instead of the top income tax rate, now 39.6 percent — lives on.

It’s the tax break that won’t die.

The contrast between Democrats’ demands for action during the campaign and the merely desultory efforts in the year since reveals how the Democratic Party’s commitment to the issue is more complicated than its campaign slogans of 2012.

Yes, Republicans are dug in so deeply against any change that might raise taxes — in this case, the removal of a tax cut benefit — that odds of passage are small.

But specialists on the issue say they also detect Democratic ambivalence: crusading against the “carried interest’’ loophole at this stage would inflame an important source of campaign contributions for Democrats.

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Since 2000, private equity, hedge fund, and venture capital managers have spent a combined $352 million on federal elections, fairly evenly split between the parties, 53 percent for Republicans and 47 percent for Democrats, according to the Center for Responsive Politics.

Even with a special committee considering a budget pact in December that could include tax code changes, few are speaking up strongly on the subject.

“The issue has been an effective fund-raising tool for both parties,” said Victor Fleischer, a University of California San Diego law professor who is a leading authority on the issue. “The Republicans, because their base doesn’t like tax increases, and the Democrats because private equity firms believe some legislators can be persuaded.”

Democrats, Fleischer said, “consistently said some of the right things” on the issue but have not put much effort into promoting tax overhaul.

Massachusetts, despite its liberal politics, is one of several epicenters for the financial sector executives who benefit most from the break. Though the state’s Democratic politicians have railed against the tax break, they have a mixed record on follow-through.

Both of the state’s new senators, Edward J. Markey and Elizabeth Warren, pledged during their campaigns to end the break for wealthy fund managers. But neither has so far made it a priority in office. They blame Republican obstruction for thwarting efforts to close the loophole.

“Republicans really don’t want to in any way engage on the issue of raising revenues,” said Markey, who voted with Democrats when he was in the House to pass several measures to close the loophole that died in the Senate.

“Change occurs over time,” added Warren, who says she is adamant that carried interest should be part of any budget or tax code negotiations with Republicans. “There have to be enough people to stand up and speak loudly enough.”

Still, their elections marked a departure from their predecessors. In the Senate, Scott Brown, a Republican, opposed any change in the tax rate, while John F. Kerry, a Democrat, showed ambivalence, warning about “unintended consequences’’ of the change and at times echoing the industry’s argument that eliminating the tax break posed a risk to the economy, even while voting for the change at least twice.

The tax break may be the best example in Washington of why it’s so difficult to take on a special interest.

The Private Equity Growth Capital Council, a chief lobby for the industry, has pushed hard to link the tax break to bedrock American principles of rewarding risk-takers. Its website has a video depicting a pair of fictional sisters who open a restaurant, noting that the tax structure for billion-dollar private equity firms is no different than it is for small businesses.

The industry group insists that the exemption isn’t a loophole. It asserts that eliminating the exemption would curb investment, including real estate.

Tax specialists say the industry has done an especially good job at capitalizing on the confusing aspects of tax law to sow seeds of doubt about the benefit, which allows much of their income to be taxed at the lower, capital gains rate rather than the higher income tax rate.

“There really is no argument for carried interest to receive capital gains treatment,” said Edward D. Kleinbard, a former chief of staff at the Joint Committee on Taxation and now a law professor at the University of Southern California. “They’re just designed to confuse and bamboozle.”

Though many big businesses tend to favor Republicans in their giving, private equity, hedge funds, and venture capital executives have given generously to both parties. Two of Massachusetts’ top 20 Democratic donors in the most recent election, for example, Jonathan Lavine and Joshua Bekenstein, are top managers at Bain Capital, the private equity firm founded by Romney. The state’s fifth and eighth biggest Democratic donors, brothers Douglas and George Krupp, cofounded a real estate investment and private equity company. Number six on the list, Walter Gilbert, is a venture capitalist.

The industries have been especially helpful to Majority PAC, a “super committee’’ operated by allies and former staffers of Senate Democrats including majority leader Harry Reid that can accept unlimited contributions. James H. Simons, founder of the Renaissance Technologies hedge fund, gave Senate Majority PAC $3 million ahead of the last election. Vincent Ryan, founder of Boston-based Schooner Capital, donated $350,000. Multiple donors contacted for this story declined to comment or did not respond to requests.

“The venture community has over the past few decades become an important fund-raising constituency for the Democratic Party and they’ve earned their seat at the table,” said Larry Rasky, a Democratic bundler who runs the public relations firm Rasky Baerlein.

Though Democrats have campaigned on changing the tax rate, many have quietly found ways to weaken those changes. Even Obama, who campaigned against the tax break to draw attention to Romney’s low tax burden, has narrowed his proposal this year to inflict less pain on the industry. Obama’s initial plan would have garnered $24 billion in new taxes over the next decade. The latest version, which excludes more investors, raises $16 billion.

“It’s a good one to demagogue for the Democrats,” said Robert McIntyre, director of the Citizens for Tax Justice, a liberal advocacy group. “It’s also a dangerous one for them to do because there’s so much money out there. Even if it’s not going to them, they don’t want it to flood to the other side.”

Senator Charles Schumer, Democrat of New York, is often cited for his role in protecting the financial industry. In 2007, he was pivotal in slowing momentum for a bill that passed the House by insisting it apply to more industries, a move both sides saw as a poison pill.

“He broadened it to death,” said former US representative Barney Frank, who backed several bills that passed the House.

Though Schumer consistently ranks among the industry’s top donation recipients, Frank said he believes Schumer was motivated by the impact on his state, the world’s financial capital. Schumer has since voted to close the loophole.

Kerry’s role in protecting the financial industry’s interests is less well-known. His 2004 presidential run coincided with the industry’s initial forays into political activism, and he continued to tap the them when he returned to the Senate. Kerry, like Schumer, has voted to close the loophole at least twice.

But advocates like McIntyre say Kerry did more to tamp down prospects for closing the loophole behind the scenes, using his post on the Senate Finance Committee to breed skepticism. At a series of 2007 hearings, for example, he grilled industry foes and invoked some of the arguments put forth by the industry’s lobbyist, including the notion that any change in the tax structure held risk for the economy.

“The thing we have to think about carefully in the committee are the downstream impacts of how you begin to treat this,” Kerry said then. “If you single out one piece and say we are going to get our chunk here on some theory, that theory may well have a lot of impact on how other deals are made and how other capital is treated.”

Charles Kingson, who testified in favor of imposing higher taxes on the industries, said he was not prepared for Kerry’s and Schumer’s questions, which he considered hostile.

“I was very surprised,” Kingson said. “These guys are liberal Democrats.”

Noah Bierman can be reached at nbierman@globe.com.

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