Hedging on Race

Visiting Fellow Edward Blum
Visiting Fellow Edward Blum

Just when you think there can't be any innovative ways left to play the race card, someone pulls an ace from their sleeve. A recently-formed consortium of investment professionals who are minorities and women is now claiming that if Congress increases the taxes on hedge-fund operators, which it is presently considering, it will adversely affect--yep, you got it--women and minorities.

In 40 years, civil rights goals have gone from integrating lunch counters in Greensboro, N.C., to sheltering hedge-fund operators from tax increases in Greenwich, Conn.

What a cynical and divisive rationale this is.

All small firms may suffer, or not, if saddled with higher taxes, regardless of the race or gender of its principals.

Let's be real: after the summer plunge in stock and bond values, hedge-fund managers aren't the most endeared professionals these days, and they know it. Even without the recent market volatility, they faced a difficult challenge convincing Congress that a large part of their compensation--which often reaches multi-million dollar amounts--should be taxed at the capital-gain rate of 15% instead of the earned income rate, which can be as high as 35%.

In all likelihood, the hedge-fund industry's public relations people understood the struggle they were up against in generating any sympathy for this policy on a Democratic Capitol Hill with an election looming. So that's where the newly-formed "Access to Capital Coalition" comes in: Turn a debate about how hedge-fund and private-equity managers' compensation is taxed into one about civil rights. Who, after all, could be in favor of any policy that is harmful to women and minorities?

The new group has some big hitters among their members including Earvin "Magic" Johnson who is now the principle of the multi-billion dollar Canyon Johnson Urban Fund, and Robert Johnson, the founder of Black Entertainment Network, which he sold to Viacom for over $3 billion.

This race-gender tactic is repellent. Reasonable people can have a reasonable debate about whether Congress should raise taxes on "carried interest," a slice of the profits that go to the managers of these pooled funds. Persuasive arguments have been offered by those who want to maintain the current system and those who don't. But it is simply ludicrous--pathetic, really--to claim that women- and minority-owned investment firms will suffer more than their similarly-situated counterparts if taxes are raised.

All small firms may suffer, or not, if saddled with higher taxes, regardless of the race or gender of its principals. This kind of "disparate impact" rationale has been fought tooth and nail by business interests in their employment practices for over three decades.

Some observers speculate there are two reasons behind the formation of the Access to Capital Coalition. The first is to peel away black and Hispanic members of Congress who have been vocal in supporting legislation to end the lower rate. Specifically targeted is the chairman of the House Ways and Means Committee, Charles Rangel, an African-American who sponsored legislation, along with 22 other Democrats, to raise this tax.

The other reason is to give cover to Democrats in the Senate like Charles Schumer and Christopher Dodd whose constituents and donors greatly benefit from the status quo.

Whatever the reasons, it is sad that this race ploy is being embraced by the very investment firms that should know better--the same ones, in fact, that have had it played against them for years.

Just a few months ago for example, Jesse Jackson fired off a shot at the Blackstone Group's Stephen Schwarzman for not setting aside more shares of the firm's IPO for minority-owned firms. Mr. Jackson called Blackstone's refusal to kowtow a "pattern of exclusion" that results in "Wall Street apartheid." This kind of shake down is an old story.

So it is especially ironic that the Wall Street Journal now reports that some funding for the Access to Capital Coalition is being provided by the Private Equity Council, "a Washington-based association formed by 11 larger funds including the Blackstone Group and the Carlyle Group." It appears that the investment community has taken a page from the Al Sharpton-Jesse Jackson playbook.

Regardless of how this issue is resolved, needlessly introducing race, ethnicity, and gender as a wedge to promote one policy over another is wrong. Let's have a debate about the costs and benefits of this tax increase without dealing from the bottom of the race deck.

Edward Blum is a visiting fellow at AEI.

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