Donald Trump campaigned on the elimination of the carried interest tax loophole that applies to hedge fund managers but both the House and Senate Bills leave it untouched.
A tax loophole that benefits billionaire investors remains largely untouched in both the House and Senate Republicans’ tax reform bills, despite President Donald Trump’s repeated promises to do away with it.
Leaving the provision unchanged effectively means that a home builder or other local business person would pay a higher tax rate on their income than a Wall Street hedge fund manager would pay even on a larger income.
The loophole is known as the carried interest, a feature of the U.S. tax code that allows hedge funders, real estate investors, venture capitalists, and private equity managers to pay taxes at the long-term capital gains rate instead of the rate imposed on the highest bracket of income earners.
Carried interest is the share of total profits from clients’ investments that hedge fund, private equity and a number of other investment managers collect. These firms earn income by collecting a percentage of their client’s profits (most commonly a 20 percent fee on profits). The profits these managers bring in are taxed at the 20 percent capital gains rate (plus a 3.8 percent Obamacare surtax), as opposed to the top rate on ordinary income of 39.6 percent.
Opponents argue that carried interest is simply remuneration for the work involved in growing a company a fund invests in. They say that the preferential long-term capital-gains treatment should be reserved for investors who are risking their own money. Supporters argue that carried interest is akin to “sweat equity.” They call fund managers entrepreneurs who take on the risk of raising money from outside investors and putting the dollars into companies that might not pan out. They say the tax incentive contributes to job growth and innovation. When President Barack Obama tried, unsuccessfully, to end the preferential tax treatment, the Treasury estimated that doing away with it would raise $17.7 billion over a decade, although a prominent critic of carried interest put the figure at $180 billion. The House and Senate proposals would generate far less, analysts said. Whether or not the exemption creates jobs or its closing would create revenue, it certainly sweetens the pay for those working in the field. As industry wisdom holds, “Live on management fees, live for carry.”
“If you were designing something that perfectly avoids hitting private equity, venture capital and real estate, this would be it,” Victor Fleischer, a law professor at the University of San Diego, told The New York Times of the House’s bill.
“The real issue is that carried interest is compensation for services performed for the investment fund,” Fleischer said. “If you write a book, and it takes three or four years before you earn a royalty, that doesn’t make the income a capital gain. If a movie takes three years to generate a return, that doesn’t make it a capital gain. There’s no reason why financial services should be any different.”
“Carried interest is a capital gain and should be taxed no different from other capital gains income. Lawmakers are considering a compromise between those who want higher taxes and those who want pro-growth policies that would increase the minimum holding period of carried interest capital gains from one year to three years,” Alex Hendrie, Americans For Tax Reform tax policy director, told The Daily Caller News Foundation. “Further increasing taxes on carried interest capital gains would hurt investment in the economy and those who rely on this investment for retirement.”
I’ll begin by saying my main issue with this is that this loophole is only allowed to be used by the rich. Under the House bill, Americans making $45,000 a year will pay 25 percent rate on their income, while hedge fund managers will still be able to pay the 20 percent capital gains rate. That is ridiculous. I am all for the cutting of taxes for all classes. I’m all for incentivizing investment. What I am firmly against is the rich using Tax Loop Holes to not pay Taxes as they should. Donald Trump ran on this being taken out. He even went so far as to say this loophole allows managers to “get away with murder.” This Bill is far from done. I would like to see them continue their path to help economic growth but they need to make sure they are helping the everyday Americans as well. Economic growth on its own is not enough to help the American people.