President-elect Donald Trump railed against his main political opponent for allowing a tax break that lets some investment managers pay lower tax rates than average workers. After he takes office, he may have no one to blame but himself.
Some tax law experts say Trump could unilaterally end the so-called “carried interest” loophole, which enables fund managers to pay a tax rate as low as 20 percent -- roughly half the top rate for ordinary income.
Republican lawmakers have shown little desire to change it. But Trump could act without going through Congress because there’s no official statutory definition for carried interest, according to Roberton Williams, an economist with the Urban-Brookings Tax Policy Center. “It’s defined by IRS regulation,” Williams said. “And they could redefine it.”
Carried interest is the portion of a fund’s profit -- usually a 20 percent share -- that’s paid to private equity managers, venture capitalists, hedge fund managers and certain real estate investors. Currently, tax authorities treat that income as capital gains, making it eligible for the lower rate. The top tax rate for ordinary income is 39.6 percent.
Trump highlighted the carried-interest tax break during his populist presidential campaign, labeling some hedge fund managers “paper pushers” who are “getting away with murder.” During his second debate against Democratic nominee Hillary Clinton, he criticized her for failing to abolish it during her years in the U.S. Senate. Clinton had previously said that, as president, she’d ask the Treasury Department to use its authority to end the carried interest loophole. Trump’s plans remain unclear.
The president-elect’s transition team didn’t return two e-mail messages seeking comment. Tara Bradshaw, a spokeswoman for Trump’s nominee to lead the Treasury Department, Steven Mnuchin, didn’t respond to an e-mailed request for comment.
Trump Blueprint
The carried-interest tax break dates to the 1920s, when Congress first set up a preferential rate intended for the sale of capital assets such as farms and mineral properties, according to a 2013 paper by Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center. Over time, many prominent investment bankers sought to take advantage of that rate, and the IRS accepted their arguments -- a move that Rosenthal argues “drifted away from Congress’s original statutory framework for capital assets.”
If Trump acted to change the regulatory definition, he might face legal challenges from entities affected, who’d argue that he exceeded his executive authority, experts said. Opponents might be found in the $2.5 trillion private equity industry, which has previously lobbied against changes to the tax treatment of carried interest. Billionaire Wilbur Ross, who made his fortune in private equity, is Trump’s nominee for Commerce secretary. Jamie Hennigan, a spokesman for Ross, directed a request for comment to the Trump transition team.
“The tax treatment of carried interest capital gains is sound tax policy which encourages the U.S. tradition of entrepreneurial risk taking," said James Maloney, a spokesman for the American Investment Council, which lobbies for the private equity industry. He argued that amending carried interest would require statutory changes.