President Obama on Wednesday renewed his call to put an end to the multi-billion-dollar a year “carried interest” tax loophole that has long benefitted wealthy private equity and hedge fund managers.
Coming only days after Republican presidential frontrunner Donald Trump and former Florida governor Jeb Bush targeted the tax break for elimination, Obama argued in a speech to the Business Roundtable that the nearly $2 billion of annual foregone revenue could be better used to bolster spending for vital domestic and national security programs.
“You’ve got two leading candidates on the Republican side who’ve said we should eliminate the carried-interest loophole,” Obama said in his address to many of the nation’s top business leaders and executives, according to The Hill. “Keeping this tax loophole, which leads to folks who are doing really well paying lower rates than their secretaries, is not in any demonstrable way improving for our economy.”
The multibillionaire real estate magnate Trump stirred the pot in the financial world last weekend by telling CBS News’ “Face the Nation” that hedge fund managers are “getting away with murder” with this tax loophole, and that he would do away with the carried interest provision if he is elected President. Bush followed suit with a salvo against the carried interest provisions, although it was part of a comprehensive tax reform plan that included lower taxes across all income brackets and a reduction in the corporate tax rate.
Bush, who made his fortune after leaving the governor’s mansion through real estate and financial investments, has heavily tapped into the financial world to raise money for his struggling campaign. As The New York Times reported, Henry R. Kravis, the powerful private equity investor, hosted a $100,000 a plate fund-raising dinner for Bush at his Park Avenue apartment in New York City earlier this year that raised more than $4 million for Bush’s campaign.
Typically, private equity and hedge fund managers put together investment deals in a way in which they can collect a percentage of an investment’s profits as compensation – or “carried interest” – regardless of whether they invest their own capital, according to tax experts. A glaring loophole in the federal tax code allows these investment managers to declare this income as a capital gain instead of regular executive salary. That enables them to pay a substantially lower tax rate – 20 percent instead of 39 percent.
Finance partnerships earned slightly more than $1 trillion of income in 2012, with roughly half of those funds taxed at long-term capital gains rates or preferential dividend rates, according to The New York Times. The Treasury Department has estimated that taxing carried interest at the higher ordinary income rates – as Obama has recommended -- would raise about $18 billion over the coming decade.
Obama first raised the idea of eliminating the carried-interest provision when he campaigned for his first term in 2008. His renewed call for this comes amid rising concern in both parties about the plight of the middle class and income inequality that benefits the nation’s wealthiest Americans.
Sen. Bernie Sanders of Vermont, a contender for the Democratic presidential nomination, argued recently that the Treasury has the authority to close the loophole if it chooses. Former Secretary of State Hillary Rodham Clinton, the current Democratic presidential frontrunner, and former Maryland governor Martin O’Malley, another Democratic candidate, have also proposed closing the carried interest loophole.
However, even with Republican heavy hitters like Trump and Bush on board, the drive to erase the tax break from the federal code faces a steep uphill climb. The private equity investment industry has vigorously lobbied against a change in the law, arguing that a carried interest tax increase would nearly double taxes on businesses that facilitate investment and job growth in the United States.
“While some supporters of the tax increase claim it is only a tax on hedge fund managers, the proposed tax increase is squarely aimed at real estate, private equity, venture capital, and other businesses that make long-term investments that stimulate economic growth, innovation, and job creation,” the Private Equity Growth Council, an industry group, argued in a letter to members of the Senate Finance Committee in April.
William Gale, a tax policy expert with Brookings Institution, said today that it is “extremely unlikely” any major tax reform would be enacted before next year’s election. “This is a Republican Congress in an election year, and it doesn’t seem likely to want to raise taxes on high-income households,” he said in an interview.
Former House Ways and Means Committee Chair Dave Camp (R-MI) proposed closing the loophole as part of a broad tax reform plan that never made it out of committee, and his successor, Rep. Paul Ryan (R-WI), has said that Congress would not address the issue until after the 2016 presidential election.
“That is on the individual side of the code, so it’s not something that we’re looking at right now,” Ryan said at an accounting conference in Washington in May, according to Bloomberg. “That’s what we see as a 2017 conversation.”
The Club for Growth – an influential conservative advocacy group – has launched a $1 million ad campaign this week attacking Trump for his support for higher taxes on hedge fund managers. The issue could well come up tonight when Trump squares off with 10 of his rivals in the second nationally televised GOP debate from the Ronald Reagan Presidential Library in Simi Valley, Calif.