A Message from National Review

Jack Fowler, NR’s publisher and chief fundraiser, was kind enough to drop me a note recently imploring me to renew my subscription now, as the hour is late and the crisis is upon us.  The lead paragraph reads in its entirety:

These are disturbing times.  Hillary Clinton’s lies are staggering in number, breathtaking in scope, frightening in consequence – and get a pass from a gutless FBI.  The Justice Department thinks bathrooms-for-creeps is a civil right.  Obama and Kerry follow the Iran Deal with a $400-million ransom chaser.  Economic growth remains pitiful.  ISIS “lone wolves” slaughter Americans.  Black Lives Matter activists wage war on cops.  Triggered Social Justice Warriors channel Chi-Com cultural revolutionaries as they fight free speech, and pillory all who refuse to genuflect at the altar of the Church of Climate Change.

Wow.  Sounds serious.  And yet despite these many terrible threats, Jack’s magazine has spent the better part of the last year doing everything in its power to get Hillary Clinton elected.  I’m sure it must be due to space limitations, but nowhere does Jack’s letter get around to mentioning some guy named Trump, much less NR’s ongoing jihad against him.

Seriously, who is this letter targeted at?  Subscribers who haven’t bothered to read the magazine or visit its website in a long time?  People who respond viscerally to “Chi-Com”?  The letter indicates NR has a pretty low opinion of its subscribers’ intelligence.  Considering I’ve been giving these poseurs money for 30 years, maybe they’re on to something.

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Predictions

It’s the day before the big day.  Time to make the predictions:

1.  Hillary wins the Presidency (in a squeaker – hope I’m wrong on this one), while the GOP holds the Senate and House.

2.  Trump bests McCain and Romney’s popular and electoral totals.

3.  Hillary and Kaine are the last all-white Democratic ticket.

4.  Hillary won’t run for re-election in 2020.

5.  The parties continue to realign along racial lines, with the GOP the party of whites and the Democrats the party of everyone else (not a welcome development by any stretch, but it does seem to be the way the wind is blowing).

6.  The NeverTrumpers and Chamber of Commerce split off to form their own party dedicated to espousing conservatives platitudes just enough to throw future elections to the Dems (while of course denying they are doing any such thing).

7.  Things continue to get worse.

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Kevin Williamson At It Again

Kevin Williamson is at it again.  Although undeniably a bright guy, his Stage 4 Trump Derangement Syndrome is causing him to produce sloppy, inaccurate stuff.   The article is especially insufferable because in it Williamson claims that Donald Trump is too dumb to understand carried-interest taxation.  Williamson then proceeds to show he himself has no idea what carried-interest taxation is.

Kevin starts off by purporting to explain the carried-interest “loophole” (which we both agree is not a loophole at all).  He writes: “Here’s how it works.”  But he then proceeds to describe capital-gains taxation, a subject related to, but entirely different from, carried-interest taxation.  He then says that carried-interest taxation is very important to venture capital (VC) and private equity (PE) funds:

If you’re the cash-strapped startup, you go to venture capitalists; if you’re the established business, you go to a private-equity group. In both cases, the deal looks pretty similar: You get cash to do what you need to do, and the investor, rather than lending you money at a high interest rate, takes a piece of your company as recompense (for distressed companies being reorganized by private-equity firms, that’s usually 100 percent of the firm) on the theory that this will be worth more — preferably much more – than the money they put into your business. Eventually, the investor sells its stake in the company and pays the capital-gains tax on its capital gain.

All of this is true, and all of it has nothing whatsoever to do with carried-interest taxation.  Again, he is describing garden-variety capital-gains taxation.  If you or I contribute money to a company in exchange for its stock, then we too will be eligible for long-term capital-gains rates when we sell the stock after owning it for more than one year.  Carried interest has nothing to do with it.

He then goes off on two tangents which actually undermine his support for taxation of carried-interest distributions as long-term capital gains.  First, he claims that PE and VC funds will often provide advice to portfolio companies (i.e., companies in which the PE or VC fund has made an investment).  This is true.  And it is also true that when the portfolio company pays the VC or PE fund money for this advice, either as consulting fees or as compensation for acting as members of its board of directors, that compensation is taxed as ordinary income.

Second, he compares carried-interest taxation to the company stock given to employees as “sweat equity.”  Umm, no.  Company stock given to employees is in fact taxed as ordinary income.  Really, you can look it up!  It’s called section 83 of the Internal Revenue Code.  Only after employees have paid income tax on the fair market value of stock at the time they receive it will future appreciation of the stock will be eligible for long-term capital-gains taxation.  This is why many companies use stock options instead of stock, because stock options typically have no value at grant.

Since Kevin never gets around to describing what he purports to be writing about, I will do it for him.

So what is carried-interest taxation?  Investment fund managers such as PE and VC funds, as well as other fund managers like hedge funds, infrastructure funds, natural resources funds, real estate managers, etc., raise money from institutional investors such as pension funds, insurance companies and high-net-worth individuals.  These investors sign a subscription agreement with the fund manager.  In this agreement they promise to pay the fund manager an annual management fee, usually expressed as a percentage of committed capital (e.g., 2%), for managing the investment.  This fee is taxed as ordinary income to the fund manager.

The investor also agrees to pay the fund manager a specified percentage of fund profits in excess of an agreed upon hurdle rate.  For example, a typical waterfall provision (i.e., the provision in a partnership agreement that dictates the priority of partnership distributions) might say that all distributions go to the investors until they have received back their capital contributions, and then to the investors until they have received the hurdle rate on their capital contributions (e.g., a 10% annualized return), and then distributions in excess of the hurdle rate will be split 80% to the investor, and 20% to the fund manager.  The 20% paid to the fund manager is its carried interest; that is, it is a partnership interest carried by the other investors.

It is important to note that the fund manager typically invests very little of its own money in the fund.  A one percent commitment is typical, but the IRS has ruled that 25 basis points (.25%) is sufficient to be respected as a partner for tax purposes.  In fact, I have seen fund managers put zero capital into a fund and still claim tax treatment as a partner for carried-interest purposes.

People who support carried-interest taxation say that amounts distributed as carried interest should retain their character in the hands of the fund manager; that is, if the investor would have paid long-term capital gains rates on the distribution then the fund manager should get the same treatment.  Other people believe that the diversion of profits from the investor to the manager looks a lot like additional compensation paid to the manager by its client, and thus should be taxed as ordinary income.  I have been a tax lawyer for about 20 years, and among my colleagues there is wide disagreement about which view should prevail.

The bottom line is that I agree that low capital-gains rates are good, that sweat equity is good, that PE or VC advice can be good.  But none of them have anything to do with carried-interest taxation.  I don’t blame Kevin for being confused.  Subchapter K of the Internal Revenue Code (the part that covers partnership taxation) is very complex, and not everyone can be an expert.  But when you’re not an expert, it’s unwise to assail others (even people like Donald Trump) for failing to understand an area you clearly do not understand yourself.

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Is National Review Still “Against Trump”?

Just wondering.  I mean they had the whole special “Against Trump” issue back in February, during the height of the primary fracas.  But Trump has clinched the nomination now.  Does our nation’s primary journal of conservative opinion remain officially against the Republican nominee?  If so is it now officially for the Democratic nominee?  Or is it going to officially sit this one out, while unofficially assisting the Democrats as party central for the NeverTrumpers?

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Those Principled NeverTrumpers

Great post from Ace at Ace of Spades, on the childish refusal of the NeverTrumpers to take responsibility for the consequences of their actions.  Read the whole thing, as they say.  His premise, which seems eminently sound to me, is that the NeverTrumpers want to pretend that their constant attacks on and refusal to support Trump, which decrease the likelihood of him becoming president, do not at the same time increase the likelihood of Hillary Clinton becoming president.  Indeed, they deny any responsibility for this outcome, even though it is the entirely logical and predictable result of their efforts.

Notwithstanding Bill Kristol’s yeoman work, the intellectual locus of the NeverTrump movement seems to be at National Review, where writers Kevin Williamson, Jay Nordlinger and David French flail away at Trump daily in spasms that increasingly resemble monomania.  Presumably the NeverTrump view enjoys tacit, if not official, institutional support there, given the total absence of pro-Trump writers or any rigorous discussion of Trump’s agenda.  So why would a historically conservative magazine undertake to elect Hillary Clinton over the Republican nominee?

I have four different, though not mutually inconsistent, theories:

The Evil Donors.  I try to steer away from cynicism in evaluating the motives of people I believe to be decent, principled allies in the battle of good versus Democrats.  But I also know that us humans like money. And jobs.  It is no secret that large donors to the GOP and conservative think tanks broadly loathe the Trumpian agenda and are not shy about saying so.  The donees of their largesse surely take note.

The Incestuousness of Conservatism, Inc.  Movement conservatism exists in an interconnected world of lobbyists, donors, Congressional staffers, political consultants, think tanks, advocacy groups and media operations.  For a host of reasons, the Trump candidacy is a threat to various components of this ecosystem.  Even if an individual member of the hive is not personally threatened by the Trump phenomenon, he or she likely has a friend, relative or spouse who is.  And all of them are wary of offending contacts or potential future employers.

It’s Personal. I can certainly imagine that it must be humiliating to spend your life building up an organization and a movement only to have some unsophisticated poseur (a veritable “witless ape,” in Kevin Williamson’s charming phrase) waltz in and take over the joint without breaking a sweat.  It must be doubly painful when you have confidently predicted all along, drawing on your vast experience and network of insider contacts, that such a thing could never happen.

And then it does.  To top it all off, the impertinent parvenu hasn’t learned the rules, the etiquette, the wonkish policy details – for God’s sake man, he doesn’t even know Burke from Strauss!  Yeah, that’s gotta leave a mark.

Pre-mortem of the Post-mortem.  The final theory is that NR is banking on a massive Trump defeat, after which they will be able to say “See, we had no part in this. We tried to warn you. But you were seduced by the intemperate bluster of Drudge and Brietbart, the slinky stylings of Coulter and Ingraham. All is forgiven. Gather round now, and listen to our Reformicon agenda for the future!”

I just don’t think that’s going to happen.  Rather, I see two outcomes for the NeverTrumpers, both bad.  Either Trump wins, and NR is further marginalized down to a Nockian remnant of its peculiar brand of conservatism, one with such selective appeal the entire movement can carpool in a Winnebago.  Or Trump loses, and a great and goodly number of the 85% of Republicans who support Trump know just who to blame for the Hillary Era.  I can’t think of any scenario where conservative voters want to thank NR for aiding the enemy.

The NeverTrumpers pose as a movement based on principle, but are utterly unprincipled at their core.  If they honestly believe Donald Trump is a greater threat to conservative principles than Hillary Clinton, they should say so.  Say it loud, say it proud.

But they don’t.  Nope, because while supporting Trump can damage your career prospects at Conservatism, Inc., asserting the utterly delusional could be even worse.  So instead they evade, they obscure, they change the subject, they deny the logical and obvious results of their efforts are what they intend.  You know, like principled people.

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Say It Ain’t So

The Journal of American Greatness is shutting down.  The site, which was only around for four months or so, attained outsized influence during its brief run for its attempt to provide an intellectual framework for the Trump phenomenon.  I am sorry to see them go, as they were providing a valuable service for which there is certainly a need.

From their announcement it’s not clear why exactly they are calling it quits.  With any luck Decius and the gang will reconsider, regroup and reappear in a new venue.  One can hope.

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Exclusive: Transcript of Hillary Clinton Remarks to Goldman Sachs

A friend of a friend who knows a guy whose girlfriend used to work at Goldman passed along the following:

Transcript of Hillary Rodham Clinton’s remarks to Goldman Sachs partners, employees and select clients, delivered on October 24, 2013 in New York, NY.*

[Introduction by CEO Lloyd Blankfein omitted]

Begin Transcript

CLINTON: Ladies, gentlemen, distinguished benefactors.  I am most pleased to be here this evening.  At the outset I’d like to thank you all for being such good sports and turning over your phones to the Secret Service folks when you entered.  Unfortunately it’s the sort of precaution we have to take to make sure our time here tonight stays just between us.

Now I don’t know how many of you here tonight were in attendance at the speech I gave at your conference out in Arizona last March.  That was my first time speaking at a Goldman event, my first “gig” [makes “air quotes” with fingers] after leaving the State Department. And what can I say?  It was, as the kids say, a hoot.

A little background might help set the stage.  I was pretty nervous.  I’d never been offered $200,000 to share my thoughts on a subject of my choosing.  So I prepared like the Dickens.  Me and four assistants spent the better part of a week researching all the public corruption case law there is on quid pro quo payments and influence peddling.  There’s just not a lot out there when it comes to payments allegedly made for speeches, but what little there is seemed to focus on the length of the speech, not the content.

Long story short, we decided that I could say anything I wanted as long as I kept talking for at least 22 minutes.  We thought it would be a lot of fun if I read that Dr. Seuss classic Green Eggs and Ham.  So I did!  Three times!  It turns out that it’s a pretty short story, even if I read s-l-o-w-l-y.  I think I read it the last time in my Elmer Fudd voice. [Laughs] Like I said, it was a hoot.

Now if you were there, don’t be alarmed.  You won’t have to listen to the same spiel again. My speech tonight is completely new – I didn’t even bring my copy of Green Eggs and Ham.  We did a little more research after that first speech and it turns out that if you get paid a lot of money for reading Green Eggs and Ham, you just might get a nasty letter from the Theodore Geisel estate, and nobody wants that.

So tonight I am not going to focus on the length of the speech, but on the substance. Otherwise I’d have to drone on for another 16 minutes or so to hit that 22-minute sweet spot, and nobody wants that either.

Instead I am going to give you ten keys to success in life and business.  Ten nuggets of solid-gold guidance that I can get out in a couple of minutes or so, and that should establish beyond any doubt that my remuneration for these remarks is reasonable compensation and not a thinly disguised payment for access [winks at audience].

Here we go:

Number 1: Early to bed, early to rise.

Number 2: You can always add more salt, but you can’t take it out.

Number 3: Wear sunblock — I mean it.

Number 4: Buy low, sell high.

Number 5: It’s not the heat, it’s the humidity.

Number 6: Yoga. Yoga. Yoga.

Number 7: Red means stop, green means go.

Number 8: I’m really serious about the sunblock.

Number 9: The best investment you can make is in your friends.

And Number 10: Never forget, it’s good to have friends in high places.

Thank you, and good night.

End of Transcript

* I cannot completely vouch for the transcript’s authenticity or accuracy, only its truthiness.

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Burn It All Down: Nihilism or Renovation?

Over at Neo-neocon (a blog I like quite a bit) Neo observes that Trump’s apparent primary victory may have been “baked in the cake” in the sense that an angry electorate was in no mood for optimism and decorum, and viewed him as the best “incendiary device” for attacking the GOP establishment.  I think there’s a lot to that — it’s probably as good an explanation as any.  Read the whole thing, as they say.

But what struck me most about the post is her suggestion that Trump’s victory represents a triumph of a faction that just wants to “burn it all down.”  Her implication, I think it’s fair to say, is that the burning down is the end in itself, rather than a means to an end.  In this telling a good number of Trump supporters are the sorts who just want to watch the world burn.

I’d like to think to think there is a more noble impulse at work.  The burning down may be the first step in a renovation by a homeowner who can’t afford the permits and cost of a proper demolition company, but who knows the old structure is unsound and a new one is needed.  Sometimes you have to raze a house to raise a house, as it were.  Neo notes that it’s too early to know how this all will turn out, but I’d like to think an unambiguously bad outcome is not “baked in the cake.”

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