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Donald Trump’s campaign diatribes often include the standard populist canard against “paper pushers” in favor of people who “build things.” This accusation has a many-thousand-year pedigree (the Babylonians building Ziggurats said it about their Assyrian bankers) and has usually been wrong, always exaggerated, and occasionally downright ugly in its tone and targets. Unfortunately, it’s also often been effective. One can’t help but wonder: Does Donald Trump actually still build things? Or does he mostly just license his name to things—another form of paper pushing? Yes, I’m saying to The Donald, you didn’t build that Trump eau de toilette.

Punishing hedge funds with higher taxes has a broad populist appeal. Now, Republican front-runner Trump has weighed in with a characteristically measured statement: “Hedge fund guys are getting away with murder.” Expect Trump’s still-forthcoming tax plan to put an end to this unpunished murder and do many other wonderful things besides. Trump says his plan will be “great” and “huge,” but changing the way hedge funds are taxed will be more complicated than he lets on.

The main issue is what’s called the “carried interest loophole.” (For the sake of sanity, I’m going to assume that this is what Trump is referring to when he blasts the homicidal hedge-fund guys—though carried interest is a far bigger issue for private equity funds than it is for hedge funds). The loophole (not everyone considers it a loophole) allows hedge-fund managers to claim a portion of their remuneration not as income but as capital gains and thus pay a lower tax rate. Defenders argue that this treatment is appropriate, as money is at risk, and beneficial, as it encourages investment. Moreover, it’s consistent with the way employee-incentive stock options and professional partnerships are taxed. Opponents say that the carried-interest loophole is bad accounting, and the incentive argument is a form of “voodoo economics.” Both opponents and defenders of the carried-interest loophole have points—particularly when it comes to the accounting, on which it’s not difficult to argue either case. (Full disclosure: most of what I do is traditional asset management, not “hedge-fund management” and certainly not private equity, so all of this only applies to me in a very small way; thus, like many others, when I magnanimously concede that this issue could go either way, I’m mostly agreeing to consider taxing other people more.)

Historically, concrete plans to tax carried interest have faltered. Why? Because the issue is much smaller—in terms of revenue generation—than it seems. For instance, the loophole does not, as the very confused New York Times claims, allow a hedge-fund manager to opt for a lower tax rate (capital gains vs. income) on his entire fee. The loophole actually applies only to long-term capital gains earned by a partnership—any partnership, not just a hedge fund—that are passed through to the general partner. The difficulty is these pass-through gains are both income—money paid for work performed—and long-term capital gain—the result of selling a successful investment. Current tax law treats them as long-term capital gain; critics want the rules changed to treat them as income.

Because hedge-fund managers pay ordinary income-tax rates on the bulk of their income, “fixing” the carried-interest issue wouldn’t generate much new revenue. That’s a problem for those wanting to use the money gained by closing the loophole to fund other goals. Perhaps realizing this, many populist tax crusaders have added an “enterprise value tax,” or EVT, to their proposals. Speaking generally, when an owner sells the businesses he spent a lifetime building, the sale is typically taxed at the capital-gains rate. Under an EVT, the sale of certain types of businesses would be taxed at the much higher, ordinary income-tax rate. Ironically, that means owner-builders would pay tax at a higher rate than pure investors (“paper pushers”) in the same business. Early EVT proposals subjected business partnerships with historical “carried interest” income to this adverse treatment. Recent proposals narrow it to businesses dubbed “investment service partnerships”—but now subject any of them to the higher tax rate regardless of whether they had ever earned any income that received the preferential treatment.

All EVT proposals share the same unsavory characteristics. They are ex post wealth taxes aimed at businesses that the EVT’s backers claim were too lightly taxed in the past. I’ll be curious to see whether, in Trump’s forthcoming tax plan, closing the carried-interest loophole involves raising revenue through an EVT. Given his bombastic attacks on paper pushers and his promises to do something “huge,” I expect it will.

Trump hopes that by taking on his own friends—the “hedge-fund guys”—he will be seen as courageous by the angry subset of the Republican primary electorate that has fueled his rise. Instead of addressing that often-valid anger with reasonable proposals, he throws out red meat about “hedge funds.” If Trump were truly courageous, he’d tell us about how tricky tax arguments, and a fair amount of cronyism, have motivated so many big real-estate transactions. He’d tell us about the wide range of local tax credits, generous depreciation laws, and the 1031 exchanges that provide real-estate tycoons like him with a loophole they can use to defer paying capital-gains taxes. He’d mention real-estate moguls’ propensity to extract tax-free income from their buildings by refinancing loans. He’d tell us about those of his colleagues who literally pay zero taxes and sometimes monetize tax credits.

In fact, if Trump is interested in ending the practice of “getting away with murder,” maybe he’d consider showing us his tax records, highlighting what he’s paid on his real-estate holdings—not his ownership of beauty pageants or his mugging on reality TV—and how that compares with his wealth (which he repeatedly tells us is vastly understated). It might turn out that his lifetime tax bill from real estate is tiny compared with his claimed wealth. If so, maybe he’d consider telling us why that’s okay. I don’t claim to be an expert on real-estate taxation and perhaps, like carried interest, many of these things have two sides to them. But even cursory examination makes clear that for a famous real-estate developer to target “hedge funds” for “getting away with murder” and not to address any of the loopholes in his own industry, he forgoes any claim to courage. He’s merely a demagogue.

If Trump supporters really love anti-hedge-fund rhetoric, they should consider supporting Bernie Sanders. The Vermont socialist is even more anti-hedge-fund than Trump, fairly anti-immigrant, and even pro-gun. Of course, Sanders wants to grow government to currently unimaginable levels, but Trump was pretty far left too, before he put his hand on a rock a few months ago and declared, “I’m a conservative!” Maybe Bernie will undergo a similar conversion.

Trump and Sanders are tapping into populist anger in a big way. Much of that anger—on both sides—is justified. Our tax code is riddled with complexity and cronyism. If the carried-interest deduction goes away, so be it. But, Donald, let’s keep our eyes on the prize here—making our tax code better and fairer—and give the demagoguery a rest.


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