Bush’s populist tack on taxes finds echoes in unlikely sources

"Populism writ large is a powerful force," said Douglas Holtz-Eakin, president of the American Action Forum, who was the director of economic and domestic policy for Sen. John McCain's 2008 presidential campaign. "And in tax reform, loophole closers are needed for lower rates."

Republicans and Democrats have been talking about tax overhaul on Capitol Hill for years, but there has been scant bipartisan agreement over how to make it work. Overall, Bush's tax plan offers a traditional Republican overhaul structure, similar to proposals by Sens. Rand Paul of Kentucky and Marco Rubio of Florida, also presidential candidates, and Rep. Paul Ryan, R-Wis., chairman of the tax-writing Ways and Means Committee.

Bush speaks of lowering overall tax rates, with fewer tax brackets; doubling the standard deduction; ending the marriage penalty and limiting the amount of deductions that wealthy people can take.

But calling for higher taxes on so-called carried interest, which represents an investment gain largely from private equity and hedge funds, sets Bush and Trump apart and puts pressure on congressional Republicans to stake out a position on an issue they have historically tried to both protect and ignore.

"I think as part of a comprehensive tax package this is something I could look at," said Sen. Shelley Moore Capito, R-W.Va.

The pressure may be most intense on Senate Republicans up for re-election in swing states next year.

"Clearly, this is animating the presidential campaign," said Sen. Patrick J. Toomey, R-Pa., who is up for re-election.

Trump's comments sent people like the anti-tax crusader Grover Norquist circling the wagons. A representative from Norquist's Americans for Tax Reform recently declared Trump's ideas "really dumb."

But with Bush's proposal to tax the wealth of private equity and hedge fund managers as ordinary income and to cap tax deductions on the super wealthy, the former governor is echoing plans long championed by Sen. Bernie Sanders of Vermont, an independent who is seeking the Democratic presidential nomination, and Warren, D-Mass, a favorite of progressives.

"Donald Trump and I both agree that there ought to be more taxation of the billionaires, the people who are making their money on Wall Street," said Warren during a television interview this week.

Even Norquist has changed his tune slightly.

"It opens the door to the idea of why not tax all capital gains as ordinary income?" Norquist said, but he added that he was not terribly worked up about it because he believed such a plan would never gain traction given the polarization in Washington.

Norquist added that he felt that Bush was simply trying to make sure that Trump did not have some distinguishing characteristic in his plan that he failed to take on.

"Politically, I think it is very understandable," Norquist said. "It neutralizes the populist impulse that Trump was tapping into." He added that the overall money at stake if the taxes were raised -- a couple of billion dollars annually -- was relatively insignificant. "That said, when Bush is now positioning himself to have a conversation about taxes, if he didn't do this, all the focus would be on $3 billion over 10 years that he didn't have in his plan that Trump did."

But for all the punch of Trump's attack on "the hedge fund guys," the issue of carried interest actually has relatively little impact on hedge funds, which mostly book short-term capital gains and therefore do not benefit from the current rules.

Investment managers who receive a share of the annual profits earned by their funds are said to have a "carried interest" in the performance of those funds.

Those earnings are not taxed at the same rate as other income. Instead, the money is taxed like the profit on an investment. This generally means the federal government collects no more than 23.8 percent rather than 42.5 percent.

The government has long imposed lower tax rates on capital gains to encourage investment. Carried interest has been taxed as a capital gain for half a century, but the amount of money sheltered from taxation at higher rates has increased drastically with the rise of private equity funds.

Proponents of the current rules argue that carried interest is a return on investment. Managers get the money only if their investments prosper. Critics, however, see carried interest as just another kind of earned income. While investment managers often put some of their own money into their funds, most carried interest is a reward for managing other people's money.

The Obama administration estimates that taxing carried interest at the same rates as ordinary income would raise about $18 billion over 10 years. Some tax experts, however, estimate the revenues could be several times larger.

Holtz-Eakin, McCain's former adviser, drew a distinction between Trump's plan to raise taxes on hedge fund managers, which he says is driven purely by the desire to tax the superrich, and Bush's, which he says fits into a larger framework that is consistent with conservative economics.

He said the Bush plan was intended to stop people from gaming the tax code to get a lower rate. By getting rid of carried interest, lower capital gains tax rates go only to investors whose own money is at risk in an investment.

Republicans on Capitol Hill said any such changes to carried interest would have to be connected to broad-based overhaul. "We're looking at it carefully," said Sen. Orrin G. Hatch, R-Utah. "Personally, I have not made up my mind."

Democrats, who are seeking a new budget deal, say they cannot wait to see what happens next. "I find it fascinating," said Sen. Patty Murray, D-Wash.