Pluralistic: 29 Apr 2021

Today's links

An 1899 Puck editorial cartoon by Joseph Keppler entitled The Bosses of the Senate, depicting towering and imperious fatcats with the names of different industries emblazoned on their chests, standing in the gallery of the US Senate, dwarfing the senators themselves.

What the hell is "carried interest" (permalink)

For at least a decade, US politicians have made symbolic, unfulfilled promises to do something about the "carried interest tax loophole," a thing that virtually no one understands. Yves Smith's explanation will remedy that.

To understand carried interest, you have to start with capital gains tax. In the US, wages – money you get for working – are taxed at a higher rate than capital gains (money you get because you sold something you own at a profit).

Supposedly, that's because capital gains are critical to pension savings. That's important given the annihilation of employer-backed pensions and the rise of "market-based" pensions dependent on working stiffs figuring out how to win at the stock-market casino.

But that's not a very compelling reason to protect capital gains. 401k-based pensions are a near-total failure.

Virtually the only people who have adequate 401ks are the very earliest workers who transitioned to them, at a time when employers offered generous matching funds as a sweetener while they got rid of real pensions with a guarantee of a dignified retirement.

The real beneficiaries of tax-preferred status for capital gains are not retirement savers, they're wealthy people, especially super-wealthy people, because the richer you are, the more you make from owning stuff relative to what you make from doing stuff.

As with other wealth-preferencing tax policies, the super-rich use the nearly nonexistent benefits to the middle class as an excuse for wildly regressive policies (think of the agitation for a SALT Cap repeal or the near-elimination of estate taxes):

The idea that people who make money from toil should be punished because they didn't make money by owning things is obviously fucked up – not least because if you tax workers' wages it leaves them with less money to buy capital on which to realize gains.

And if you let the ownership class retain more of their income, it lets them buy more stuff on which they can realize those tax-preferenced gains. Preferential tax rates for capital gains are a way to make workers poorer and owners richer, period.

So that's capital gains. What about "carried interest?" It has nothing to do with "interest" on a loan – it's a way for a specific kind of very, very rich person to pretend that what wages they do receive are actually capital gains and eligible for tax-preferenced treatment.

The name "carried interest" dates to 16th century mercantalist sea-captains, paid a 20% share ("interest") in the goods they shipped ("carried").

It's not the 16th century anymore, and the beneficiaries of carried interest aren't sea captains, they're money managers.

If you run a hedge fund or a private equity firm, you're typically compensated in a "2-and-20" scheme: every year, you pocket 2% of the money you've been given to manage, and 20% of any profits that money has realized.

These are wages, not capital gains. The money in the fund isn't your money, it's someone else's (money managers investment in their own funds is a token sum, 1-3% of the total), and your share doesn't come from selling something you own, it comes from doing a job.

PE and hedge fund managers make millions – sometimes hundreds of millions – every year this way, and because of the carried interest loophole, they get to treat those wages as if they were capital gains.

That's how it is that if you work your guts our bending steel at a sheet-metal plant, your wages are taxed at a higher rate than the wages of the distant finance-ghoul who bought that plant, debt-loaded it, and drove it into bankruptcy.

So carried interest is bullshit and yeah, we should kill it. But as Smith points out, that would be a largely symbolic victory: there are many new tax-gimmicks that money-managers could use to shift those wages around and maintain the pretense that they are capital gains.

The only reason that these ripoff plutes are even fighting about the loophole is that they find it aesthetically untenable that the US government should poke holes in the risible fiction that their wages are, in fact, capital gains.

The thing is, PE and hedge-fund managers really do see themselves as saviors of civilization, somehow characterizing their ruinous, real-economy-destroying financial engineering as socially necessary.

In support of this, they cite hedge-fund and PE takeovers of health-care and renewable energy -two vital sectors driven they've actually driven into crisis and, frequently, collapse.

As Smith points out, the fact that killing carried interest will merely trigger new accounting fictions to maintain the status quo tells us that this isn't the fight we should be having: instead, we should eliminate the tax-preferenced treatment of capital gains altogether.

If we taxed capital gains at the same rate (or higher) as wages, we'd eliminate the entire purpose of carried interest shenanigans – and we'd blunt the lobbying power of the casino-riggers who stole our pensions and forced us to rely on the market to support our old age.

A medieval tapestry-style illustration of King John I with Samsung founder Lee Byung-chul's face.

Korea set to break the Samsung dynasty (permalink)

For a society to be unequal and stable, it needs a story. If you have less-than-enough and your neighbour has more-than-enough, it's natural to ask why you shouldn't take it from them.

If that sounds weird to you, that's because you believe the story property is, by and large, legitimate. But what if you knew that your neighbor had cheated other people to get their stuff? Maybe then you'd support taking it away?

Market societies are, by nature, unequal. Markets produce winner-take-all wealth distributions of great inequality. The winners in markets have guards and cops and courts to help them defend those winnings, but their primary defense is legitimacy.

The primary reason that rich people don't have to worry about having their stuff seized by poor people is the story of markets, which is that markets allocate capital to people who can use it to make us all better off.

That is, at any given moment, in any given situation, some of us have better ideas than the rest of us about what to do with our planet's resources to make the most of them. In this story, markets find these people and give them money to spend for the common good.

That's the significance of wealth in market societies: the vast, inscrutable, self-correcting system of markets has identified you as a "job-creator," a "wealth-creator."

This is better than hereditary aristocracy, where the nation's capital allocations depend on the whims of people whose only qualification is whose orifice they emerged from. Those people squander our resources on palaces while the people starve.

This is obviously circular: if you're rich, you're good at allocating capital; we know that you're good at allocating capital because you're rich.

But there's something seductive about meritocracy, the idea that prosperity relies on something smarter than orifice-emergence.

Markets are sold as superior to the outdated divine right of kings, the eugenic notion that "good blood" and "breeding" determine who is good at capital allocation. Instead, we have a machine (the market) to find the people who have the right stuff for this particular moment.

But there's a problem with all this: the winners in markets are determined to pass their fortunes onto their children, creating intergenerational dynasties.

And because markets always yield investment returns faster than they grow, the most reliable way to get rich is to already be rich – not to produce something of value to society yourself.

That means that markets produce aristocracies, entrusting capital allocation to the wealthy, rather than the "deserving" (that is, people doing things that make the world better off).

Here's a concrete example from Thomas Piketty's CAPITAL. It's a comparison of the growth in three fortunes: Bill Gates during his tenure at Microsoft; L'Oreal heirsess Liliane Bettencourt (who has never worked a day), and Gates since her retirement from Microsoft.

Over the period where Microsoft-CEO-Gates founded and built the most successful company in the world and Liliane Bettencourt ate bon-bons and went to fancy parties, Gates made a lot of money. Betancourt made more.

But guess who made the most? Investor-Gates: that is to say, when Gates stopped running a successful company (a proxy for "doing a thing that makes other people better off") and started shuffling money around, the market allocated more capital to him.

Markets are only incidentally systems for allocating capital to people who do stuff. Mostly they are systems for allocating capital to people who already have capital.

That means that if you let people pass on fortunes to their kids, their kids will amass even-greater fortunes without having to make anyone better off; and they will pass that fortune onto their kids, who will do the same, and so on. We're back to aristocracy.

If it sounds familiar, you might be thinking of the Trump family. Fred Trump was a Klansman and slumlord who cheated his way to a fortune, who passed it on to his bungling idiot child who made it even larger, despite a string of cheats and bankruptcies.

Now his kids are poised to be richer still, despite their obvious detriment to society and unsuitability for making allocation decisions to increase broad prosperity.

Trump has a story to explain why this is OK: "good blood."

Trump frequently talks about his good blood, as do many wealthy people involved in intergenerational wealth transfers. They reveal the intrinsic contradiction of markets' superiority to aristocracy.

When people who make money doing stuff get to pass it all on to their heirs, we quickly arrive at a society where capital allocations depend on which orifice you emerged from, not what you do for the rest of us.

In other words, over time, the winners of markets sideline "meritocracy" in favor of old-fasioned eugenics. This process has been underway, slowly but surely, for decades, so much so that it's surprising to read about any interruption to it.

Take this story: "Samsung’s Lee family to pay more than $10.8 bln inheritance tax." The reason it's newsworthy is that the heirs of Samsung chair Lee Kun-hee stand to lose control of the giant Korean chaebol (family-owned conglomerate).

Kun-hee was the eldest son of the founder, Lee Byung-chul, who benefited from a postwar program in which the US assisted (or arm-twisted, depending on who you ask) the new South Korean state to restructure as a semi-planned economy.

The chaebols were formed out of family businesses that had demonstrated some success through Japanese occupation and the civil war, and were given quasi-monopolies over large parts of national production, all but guaranteeing their success.

Ironically, this mixed economy accomplished the notional goal of a market economy – it produced jobs and material prosperity, and allocated capital to the people who made that happen.

But if Lee Byung-chul was the right person at the right time, and if his son Lee Kun-hee learned enough to carry on the family business successfully, that suitability petered out by the time the third generation took over the company.

How unsuitable? Well, Lee Jae-yong, Samsung's largest shareholder, is currently serving a 2.5 year prison stint for his role in a corruption scandal that brought down the presidency of Park Geun-hye.

Given the general impunity of the chaebol aristos, the fact that he's doing any time tells you that he's an utterly indefensible sociopath.

It's his generation of Lees that stands to lose control of Samsung when they pay their sensible and proportionate inheritance tax.

As Piketty points out, if this generation was qualified to be good capital allocators and not mere winners of the orifice-emergence lotto, they'd have reproduced their vast capital stake ahead of the inheritance tax and be able to retain control.

The fact that they can't beat the market and the taxman is prima facie evidence that whatever made Grampa and Daddy suitable CEOs isn't present in their generation.

That, and the corruption conviction.

The Lees aren't going to be poor. They'll never have to work a day in their lives. What they face is being stripped of their power to make vast, nation-scale capital allocations.

If their kids don't reproduce the remaining family capital ahead of the inheritance tax, they'll be a little poorer, but still rich, and so on, until, finally, a Lee descendant will have to get a job. If you believe in markets, this should fill you with joy.

This is what we've been promised by the market's story: a world where the right to allocate capital arises due to your track record of excellence, not due to which orifice you emerged from.

The Disney Must Pay illo featuring a terrified, faceless, tiny writer with the sawtoothed shadow of a monstrous mouse looming over them.

Disney's writer wage-theft is far worse than reported (permalink)

Back in November, we learned that Disney had pulled a breathtakingly criminal wage-theft manuever on one of science-fiction's most beloved authors, Allan Dean Foster, an elderly cancer-patient caring for his sick wife.

Foster is the bestselling author of some of the most successful movie novelizations ever, from the first STAR WARS novel to ALIENS novels and more. Thanks to Disney's monopolistic buying spree of companies like Lucas and Fox, they now owned the movies and Foster's contract.

Here's where things get criminally weird. Disney argued that when they bought out Lucas, Fox, etc, they acquired their assets, but not their liabilities. In other words, they'd acquired the right to sell Foster's work, but not the obligation to pay him when they did.

This is not how copyright contracts work, period. If it were, then any publisher with a runaway bestseller novel could incorporate a new company, sell its assets – but not its liabilities – to that company, and stiff the writer.

Both Foster's agent and the Science Fiction Writers of America tried to negotiate with Disney quietly on this, but they were stonewalled and insulted (Disney insisted that they wouldn't even discuss a deal without first getting nondisclosure agreements from Foster, another unheard-of tactic).

After failing to make progress with private negotiations, they went loudly public, launching the #DisneyMustPay campaign. The good news is, the campaign was successful, and Foster has been paid.

The bad news is that the campaign flushed out many writers who are also having their wages stolen by Disney. The company is stalling them, too – refusing to search its records or volunteer info unless the authors can name the specific instances in which they've been robbed.

In response, SFWA has joined forces with the Romance Writers of America, the Horror Writers of America, the National Writers Union, Sisters in Crime and the Authors Guild to form a coalition called Writers Must Be Paid.

They have a form where writers who suspect that Disney has stolen their wages can report it, anonymously:

There's a reason for the anonymity: Disney's anticompetitive mergers (culminating with the destructive Fox merger) has created a monopoly with vast market-power to destroy creators' livelihoods by excluding them for speaking out.

The coalition has five modest demands for Disney:

I. Honor contracts now held by Disney and its subsidiaries

II. Provide royalty payments and statements to all affected authors

III. Update their licensing page with an FAQ for writers about how to handle missing royalties

IV. Create a clear, easy-to-find contact person or point for affected authors.

V. Cooperate with author organizations who are providing support to authors and agents.

More broadly, I hope this brings more creative workers into the discussion about competition.

Specifically, "monopsony," the excessive buying power that happens when a companies dominate access to a market, which allows them to squeeze their suppliers, especially workers.

This day in history (permalink)

#15yrsago Stephen Colbert kicks ass at White House press corps dinner

#10yrsago Jay Rosen: What I Think I Know About Journalism

#1yrago NSO Group employee used Pegasus cyberweapon to stalk a woman

#1yrago Founder of AI surveillance company was a Nazi who helped shoot up a synagogue

#1yrago Cigna claims to be rolling in dough and on the verge of bankruptcy

Colophon (permalink)

Today's top sources: Naked Capitalism (, Super Punch (

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