July 25, 2008
Two and Twenty Shakedown
Posted by Victor Fleischer

It's been a year since the peak of the uproar about taxing carried interest.  In the year since, the conventional wisdom about what happened has been established.  It fits pretty tightly with what some public choice theory suggests:  legislators engage in rent-seeking behavior.  In other words, it's not just the interest groups and their lobbyists who play hardball.  Kimberley Strassel writes in the WSJ:

The corporate world got an early taste of this last year, when New York Sen. Chuck Schumer used his majority status to take advantage of his home-state financial industry. It works like this: Mr. Schumer steps up to protect hedge funds and private equity from his own party's threats of taxation. In return, a grateful industry writes enormous campaign checks that Mr. Schumer, as head of the Democratic Senatorial Campaign Committee, is now using to increase his party's majority. Somewhere, Mr. DeLay is whistling in appreciation.

Sounds right to me.  For a more complete discussion, see Darryl Jones, The Taxation of Profits Interests and the Reverse Mancur Olson Phenomenon.  Darryll testified to Ways and Means last September.   On legislators as rent-seekers, see generally Ed McCaffery & Linda Cohen's Shakedown at Gucci Gulch and McChesney & Doernberg, On the Accelerating Rate and Decreasing Durability of Tax Reform, 71 Minn. L. Rev. 913 (1987) (available here).

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