Why Hillary Clinton is going after hedge funds

New York CNN —  

Hillary Clinton’s got a problem with hedge fund managers – or at least with the way they’re taxed.

The expected frontrunner for the 2016 Democratic presidential nomination is avoiding policy specifics for now, but the taxation of hedge fund managers – an elite class of investors who will no doubt pour millions into Clinton’s second White House bid – has been an early exception.

“There’s something wrong when hedge fund managers pay lower tax rates than nurses or the truckers that I saw on I-80 as I was driving here,” Clinton told a small group of roundtable participants in Monticello, Iowa, this week.

Clinton is expected to outline a more expansive range of policy proposals in the coming months. But by hitting on Wall Street tax breaks within the first few days of hitting the campaign trail, Clinton is embracing a populist agenda. The former secretary of state is keenly aware that progressive activists – some of whom prefer liberal Sen. Elizabeth Warren over Clinton – are watching her moves carefully.

So what is Clinton really talking about? She wants to close the carried interest “loophole.”

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In wonky tax parlance, carried interest is a designation of income that allows investors in hedge fund, private equity and venture capital firms to have their profits taxed under the capital gains rate – a significantly lower rate than how ordinary income is taxed. Critics have long said that under this structure, investors get away with paying lower taxes on what is essentially regular income.

A campaign aide confirmed to CNN this week that her remarks about hedge fund managers in Iowa were aimed at closing the carried interest loophole and pointed out that this is not a new position for Clinton.

“Issues of tax fairness will be resonant and effective with voters,” said Geoff Garin, a prominent Democratic strategist who advised Clinton’s 2008 campaign. “All of this will be helpful in letting average voters know that Hillary will be on their side.”

This is the same strategy President Barack Obama aggressively deployed in 2012 to paint Mitt Romney and Republicans as out of touch with average Americans.

The carried interest debate in particular has stirred up strong reactions among industry executives. In 2010, Blackstone CEO Stephen Schwarzman compared efforts to do away with the tax break to Adolf Hitler’s invasion of Poland in 1939. He subsequently apologized.

Recent polling indicates that Americans remain skeptical that corporations and wealthy individuals pay enough taxes.

Sixty-four percent of Americans are bothered “a lot” by the idea that some corporations don’t pay their fair share of taxes, while 61% percent are equally bothered by the belief that some wealthy individuals also don’t pay enough taxes, according to Pew Research Center survey released earlier this month.

Of course, most people don’t know what carried interest is. But the debate over this provision of the tax code taps into the widespread perception that certain rules unfairly favor the wealthy, said Anna Greenberg, a Democratic pollster and senior vice president at Greenberg Quinlan Rosner Research.

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“People absolutely believe that not only does Wall Street get away with all kinds of gimmicks to make more money, that Congress and the government is absolutely in cahoots with Wall Street in doing that,” Greenberg said.

The Democratic push for higher taxes has had some victories.

A deal in Congress to avert going over the so-called “fiscal cliff” in early 2013 raised the tax rate for those in the top income bracket – individuals making more than $400,000 and families earning more than $450,000 – from 35% to 39.6%. The tax rate on long-term capital gains and dividends for top earners went up from 15% to 20%.

There have also been increases tied to the Affordable Care Act and some limitations on deductions for high earners.

Matt Bennett, senior vice president for public affairs at Third Way, said this is a reality that Clinton will have to contend with.

“The fact is, taxes on the wealthy have gone up quite a bit under Obama,” Bennett said. “Part of her challenge is figuring out where to give Obama credit and where to help take credit as a Democrat.”

Sage Eastman, a tax guru and former policy adviser to former Republican Rep. Dave Camp, the ex-chairman of the House Ways and Means Committee, warned that Democrats run a risk by repeating talking points from past elections.

“It feels stale and a rerun of the last two election cycles,” Eastman said. “Is the electorate’s really still fighting the Obama v. (Mitt) Romney or are they ready to turn the corner and have the next debate?”

Whether it’s hedge fund managers or another group of investors in the finance industry, singling out Wall Street also presents political risk for Clinton.

The former New York senator has close ties to the industry and will lean on generous donations from the sector to fuel her campaign. Going too far in her rhetoric could turn off some of her potential supporters on Wall Street, including some who feel burned by the finance industry’s treatment under Obama’s tenure.

Steven Judge, president and CEO of the Private Equity Growth Capital Council, defended the capital gains treatment of profits in the private equity industry in a statement to CNN.

“For more than one hundred years, tax law has recognized that carried interest received from investing in a capital asset is appropriately treated as capital gains,” Judge said. “This policy is based on the American economic principles of rewarding entrepreneurial risk, long-term investment, and vision.”