The Disconnect

The disconnect between certain folks in Washington with the rest of the country is striking.

With most Americans unhappy with the state of the economy, (despite the best efforts of David Brooks [1]), many in Washington are risking an unfair tax hike on millions of Americans to protect an unfair tax law benefiting hedge fund managers.

The latest Bloomberg/Los Angeles Times poll [2] finds "pervasive" dissatisfaction with the economy:

The growing pessimism is being driven by higher energy costs, the weakening dollar and fallout from the subprime mortgage crisis. To stem foreclosures, most Americans want the government to require lenders to freeze interest rates on adjustable-rate loans in danger of default.

The gloom is pervasive, with poll respondents saying by a margin of 71 percent to 23 percent that they expect a recession within a year. That percentage has risen steadily over the course of 2007. Over half of those surveyed -- 56 percent -- say the economy is doing badly...

... "The housing market's only going to get worse," said Sherry Bossie, 46, an accountant from Dunbar, West Virginia, and a participant in the survey. "Put that together with escalating oil prices, and we're at great risk."

The negative sentiment also reflects broader dissatisfaction among Americans, almost two-thirds of whom say the nation is seriously off on the wrong track.

Reflecting the rising economic anxiety, almost four in ten Americans plan to spend less this holiday season on presents for friends and family, according to the poll. Only 15 percent plan to spend more.

Of course, hedge fund managers -- running wild with little public regulation [3] -- helped fuel the housing bubble and mortgage crisis [4] that is weakening the overall economy.

These high-rollers never deserved to have their work income taxed at a rate far lower than every middle-class worker in America.

And the House logically voted to end that free ride, to offset the cost of fixing the Alternative Minimum Tax mess, greatly worsened by the Bush tax cuts [5], now threatening more than 20 million Americans with an unfair tax penalty.

But the Washington Post [6] today reports what was already anticipated, that the enough Senate Dems agree with Senate GOPers to save the hedge fund handout -- thanks to heavy lobbying from Wall Street:

A major reason for that deficiency is the effectiveness of the Wall Street lobby. Private-equity firms, whose multibillion-dollar deals have created a class of super-wealthy investors and taken many large corporations private, hired dozens of lobbyists and stepped up campaign contributions this year...

..."There's been a gigantic effort on the part of Wall Street to lobby this issue; they've hired every Tom, Dick and Harry, and they've put on every former Grassley staffer they could," [Sen. Chuck] Grassley [R-Iowa] said. "It has had an impact."...

...Spending in Washington by private-equity firms and hedge funds has increased substantially. The nonpartisan Center for Responsive Politics reported that hedge funds and investment firms donated $11.7 million to federal candidates and party committees in the first nine months of this year. That is $1.6 million more than they contributed in all of 2005 and 2006.

Their lobbying expenditures also zoomed. The firms spent $8 million on registered lobbyists in the first six months of this year, compared with $3.7 million for all of 2006, the center reported.

The effort to raise taxes on managers of private-equity firms began last spring after some of those companies, also known as buyout firms, disclosed that their managers' earnings were in the hundreds of millions of dollars and that their income was taxed at the low capital gains rate of 15 percent.

Soon thereafter, senior Democrats in the House proposed to increase that rate to the top ordinary income tax rate of 35 percent. That increase is part of the AMT patch passed by the House, but it has not been proposed in the Senate.

The W. Post also reports that House leaders don't plan to budge when the Senate passes an AMT bill that protects the hedge fund managers.

Once that battle is joined, be aware what the real dispute is.

Conservatives will say fixing the AMT doesn't require offseting the cost with additional tax revenue -- despite the fact that they ballooned the AMT to mask the cost of the Bush tax cuts [5] in the first place.

That's not the real issue.

The real debate is: do hedge fund managers deserve a lower tax rate than every middle-class worker in America?

And senators should should ask themselves: with all that hedge fund managers have done for our economy, do they really want to face the voters after going to the mat for them?