New legislation introduced to Congress earlier in the month revived a contentious debate over whether fund managers’ carried interest should be taxed at an almost 100% increase over where it is today.
Drafted by Democratic Sen. Tammy Baldwin of Wisconsin and Rep. Bill Pascrell, a New Jersey Democrat, the legislation seeks to close “a loophole [that] allows certain investment managers to benefit from a tax loophole that allows them to take advantage of the preferential 20 percent long-term capital gains tax rate on income received as compensation, rather than the ordinary income tax rates of up to 37 percent that all other Americans pay,” a memo on the Carried Interest Fairness Act reads.
President Trump campaigned on the issue in 2016, and promised “we will eliminate the carried interest deduction and other interest loopholes that have been so good for Wall Street investors, and for people like me, but unfair to American workers.” His Tax Cuts and Jobs act failed to close the loophole in 2017, and Senate Republicans subsequently rejected an amendment to the tax bill by Baldwin that sought to close the loophole.
The Congressional Budget Office completed a study on the issue and concluded that closing the loophole would raise $14 billion in revenue over 10 years.
“It’s simply unfair for our workers to pay a higher tax rate than a millionaire on Wall Street, so President Trump needs to stand by his word, support our legislation and finally close the carried interest tax loophole for Wall Street,” Baldwin said in a statement.
Many senators opposed to the increase voiced that it would reduce general partners’ incentive to start investment funds, which in turn could diminish innovation and possibly make private equity markets—and consequently businesses—less efficient.
They also argued that a portion of the profits generated by the sale of an investment fund might be attributable to intangible assets, which are independent of the services provided by general partners. By increasing these taxes, it would treat general partners of investment funds differently from general partners in other industries.
The drafted legislation is available to read here. “Today, private equity investors can pay a lower tax rate than their secretaries,” Pascrell said in a statement.
“The fact that hedge fund billionaires pay a lower tax rate than cops, firefighters, and teachers is the epitome of how working people have been ripped off and looked over for decades,” New York Rep. Max Rose added.
The carried interest exception was originally designed in 1954 to help certain subsets of workers in industries like oil and gas drilling, but “has since grown to become a loophole primarily used in the financial services industry,” Pascrell said in a statement. “Today, the largest beneficiaries of carried interest are private equity partners and real estate investment firms, who use the loophole to avoid paying income taxes on compensation earned from managing other people’s money.”
The legislation has primarily garnered Democratic support so far and has been co-sponsored by New York Rep. Alexandria Occasion-Cortez, Oregon Rep. Peter DeFazio, and 17 others.
Three Scenarios for Trump-Kim Talks: Good, So-So, and Horrible
Do you have any thoughts on this article? If so, feel free to share your opinions in the comment section below!