Democratic Shakedown

The Washington Post has a rather astonishing article, one I would not have suspected that they would run. It details a split in the Democratic party over tax policy. The leadership pledged to do something about the Alternative Minimum Tax – which was inflicted on taxpayers by the Democrats in the first place. But with Washington totally addicted to tax money, they have to find a way to replace any revenue lost to a reform. Hence the idea to tax hedge funds. Which in turn leads to a pretty naked attempt to influence tax policy by contributing large sums of money to Democrats.

In early June, as the Senate Finance Committee began examining how a new breed of Wall Street titan could be paying a special low tax rate on executives' salaries, one of the richest of them, hedge fund manager Steven A. Cohen of SAC Capital Advisors, cut the Democratic Senatorial Campaign Committee a check for $28,500.

Just days later, with DSCC Chairman Charles E. Schumer (D-N.Y.) equivocating on legislation to raise taxes on publicly traded equity firms, hedge fund giant James H. Simons, who earned $1.7 billion last year at his Renaissance Technologies LLC, donated another $28,500 to the DSCC.

By late July, Schumer was off the fence — and on the side of the hedge funds and private-equity firms in opposing the Democratic legislation.

Later this week, Democrats will face more scrutiny over that choice. The House is to vote on a bill to stave off growth of the alternative minimum tax for a year, offer new tax breaks to middle-class homeowners and expand tax rebates for low-income parents — paid for largely by nearly $50 billion in tax increases on the burgeoning hedge fund and private-equity industries.

The measure has deeply divided Democrats, pitting a rank and file that has railed for years against inequities in the tax code against the party's money men, who are reluctant to bite the hand that has generously fed them. Hanging in the balance is the AMT, enacted in 1969 to ensure that the wealthiest Americans pay at least some taxes. Instead, it has increasingly affected middle-class taxpayers.

"If you're a Democrat and you have to choose between the alternative minimum tax and the hedge fund industry, that's one tough ideological choice," said Viva Hammer, who recently left the Treasury Department's Office of Tax Policy and is now a tax partner at the law firm Crowell & Moring. "It's a choice between your votes and your wallet."

Note that story does detail a rather blatant tax loophole that hedge fund managers exploit to dodge paying the same tax rates as others do. But the rather naked shakedown – and a pretty obvious quid pro quo – is not something I would have that the Post would publish.

Remember that talk of Democrats cleaning up Congress? They're cleaning up alright. Just not the way people thought they would.