Schumer's hedge

Today's Krugmaniad (Time$elect), a must read.

A Test for Democrats

By PAUL KRUGMAN

It’s been a good Democrats, bad Democrats kind of week. The bill expanding children’s health insurance that just passed in the House makes you want to stand up and cheer. Reports that Senator Charles Schumer opposes plans to close the hedge fund tax loophole make you want to sit down and cry.

Let’s start with the good news: The House bill, which the Congressional Budget Office says would provide coverage to five million children who would otherwise be uninsured.

The bill is so good that it has Republicans spluttering. “The bill uses children as pawns,” declared Representative Pete Sessions of Texas. Yes, the Democrats are exploiting children — by providing them with health care.

The horror, the horror!

What’s especially encouraging is the way House Democrats were willing to take on the insurance companies. The bill pays for children’s health care in part by cutting subsidies to Medicare Advantage, a privatization scheme that yields big profits for insurers, but that the budget office estimates would cost taxpayers $54 billion in excess payments over the next five years.

Earlier this year I worried that many Democrats would be taken in by the insurance industry’s disinformation campaign in support of its subsidies, which included the pretense that Medicare Advantage offers big benefits to minority groups. In the end, however, House Democrats refused to be rolled.

All in all, the bill is both a fine piece of legislation and a demonstration that Democrats can stand up to special interests. Happy days are here again.

Or maybe not.

The hedge fund tax loophole is a crystal-clear example of unjustified privilege. Because of a quirk in the law, the people who run these funds don’t pay taxes like ordinary mortals.

For example, the salaries that pension fund employees receive for managing other peoples’ money are taxed as ordinary income, at rates up to 35 percent. But if that money is invested with a hedge fund — and 40 percent of the money in hedge funds comes from public, corporate and union pension plans — the fees the hedge fund manager receives for his services are mainly taxed as capital gains, with a maximum rate of 15 percent.

The arguments usually made on behalf of this unique privilege make no sense. We’re told that the tax rate on hedge fund managers has to be kept low to encourage risk-taking. But the managers aren’t risking their own money. The only risk they face is the uncertainty of their fees — and as any waitress who depends on tips or salesman who depends on commissions can tell you, most people with uncertain incomes don’t get any special tax breaks.

We’re also told that management fees would rise, reducing returns to investors, if the privileged status of fund managers is eliminated — as if someone with a $100-million-a-year hedge fund job would walk away if his take-home pay fell from $85 million to $65 million.

And we’re talking about a lot of lost revenue here. The Economic Policy Institute estimates that the hedge fund loophole costs the government $6.3 billion a year — the cost of providing health care to three million children. Of that total, almost $2 billion a year in unjustified tax breaks goes to just 25 individuals.

If being a Democrat means anything, it means opposing this kind of exorbitant privilege. Yet according to a report in The Times earlier this week, Mr. Schumer says that he opposes any increase in hedge fund taxes unless tax breaks for the energy and real estate industries are also eliminated, and pigs start flying. Seriously, his claim that he really would support closing the hedge fund loophole if other, deeply entrenched tax privileges were eliminated at the same time is a fig leaf that hides nothing.

Mr. Schumer, who heads the Democratic Senatorial Campaign Committee, insists that the large financial contributions that hedge funds make to his party aren’t influencing him. Well, I can’t read his mind, but from the outside his position looks remarkably like money-driven politics as usual. And that’s not acceptable.

Look, the worst thing that could happen to Democrats is for voters to conclude that there’s no real difference between the parties, that when you replace Republicans with Democrats, all you do is replace sweet deals for Halliburton with sweet deals for hedge funds. The hedge fund loophole is a test — and it’s one that Mr. Schumer is failing.

© 2007 The New York Times Company