One of private-equity and hedge-fund managers’ most prized tax breaks is again in politicians’ cross hairs, but Democrats would need to sweep the 2020 election if they want to pull the trigger to end the option.
President Donald Trump said in May that he wanted to increase taxes on carried interest, a major form of compensation for hedge-fund and private-equity managers. Several leading Democratic presidential candidates -- including former Vice President Joe Biden, and senators Bernie Sanders and Elizabeth Warren -- also have said they want to end the break.
Yet there are a couple of reasons the carried-interest tax break, despite bipartisan opposition, isn’t dead yet. Most Republicans, and even some Democrats, oppose killing a tax option that investment firms have successfully argued creates jobs. And eliminating the break wouldn’t actually raise all that much money.
Partnerships such as private-equity, venture capital and hedge funds typically get compensated in two ways. They charge an annual management fee, as well as a performance fee, which can be about 20% of gains, depending on the fund. For tax purposes, the performance fee is treated as a capital gain, meaning that it gets hit by a top rate of 23.8%, rather than ordinary income, where rates can reach as high as 37%.
Limited Value
Various proposals to tax carried interest as ordinary income have been estimated to raise between $3 billion and $16 billion over a decade, depending on the particulars of each plan. That’s a drop in the bucket for federal spending, meaning that it has limited value as a money-raiser.
“As a political scalp, it’s still something very hot for Democrats, but no Republicans are going to vote for a tax increase,” said Stephen Myrow, managing partner of Beacon Policy Advisors in Washington. “It’s an uphill battle unless Democrats control everything.”
The preferred tax treatment is a frequent target on the campaign trail as a way to pay for other priorities. Democratic candidate Amy Klobuchar, a Minnesota senator, said in a CNBC interview in May that eliminating the loophole could help pay for infrastructure. Kamala Harris, a California senator, in March similarly cited carried interest when asked in an NPR interview about her proposed tax rebate to lower-income households.
And the current crop of candidates isn’t the first to put the break in their sights.
Failed Efforts
Former Democratic Representative Sander Levin of Michigan first introduced the “Carried Interest Fairness Act of 2012” that would have largely ended the option’s favorable tax treatment. It was never approved by the Republican-led Ways and Means Committee. The Carried Interest Fairness Act of 2015 didn’t fare any better, nor did the Carried Interest Fairness Act of 2017.
The Carried Interest Fairness Act of 2019, now sponsored by New Jersey Democrat Bill Pascrell, has 28 cosponsors, fewer than Levin had four years ago.