President Trump is proposing to eliminate a tax loophole that’s also a long-time target of some Democratic lawmakers.
Mr. Trump is working on “no tax on seniors’ Social Security, no tax on overtime pay” as well as renewing the tax cuts in the 2017 Tax Cuts and Jobs Act, White House press secretary Karoline Leavitt said on Jan. 6. But, she added, the president also wants to abolish the “carried interest tax deduction loophole.”
The latter tax break might not be well-known to many Americans given that it’s predominantly used by hedge funds, private equity firms and other types of investment funds. That loophole allows investment managers to greatly lower their taxable income, a major perk for investors whose annual earnings can mount into the billions.
Carried interest refers to the income that investment managers collect from their funds, which is typically 20% of profits. Under current tax law, that income is taxed as a capital gain, which has a top tax rate of 20% for long-term gains, versus the highest rate of 37% for regular income, such as the money that workers receive in their paychecks.
“The carried interest tax loophole is one of the clearest examples of our two-tiered tax system,” said David Kass, executive director of the tax advocacy group Americans for Tax Fairness, in an email to CBS MoneyWatch. “Average Americans can’t cut their tax burden in half for no reason, but the wealthy and well-connected can.”
Aligned with Democrats
Mr. Trump’s proposal to remove the carried interest deduction aligns him with the aims of Democratic lawmakers, many of whom have long sought to eliminate the loophole. Most recently, Senator Tammy Baldwin, a Democrat from Wisconsin, and 13 other lawmakers on Thursday introduced the Carried Interest Fairness Act, which would boost the tax rate on investment funds’ carried interest to the same rates paid by workers on their income.
Eliminating the Wall Street tax break could help boost tax revenue by about $100 billion over the next decade, according to a new analysis from the Committee for a Responsible Federal Budget (CRFB), an advocacy group focused on fiscal matters. That would only partly offset the wide-ranging tax cuts Mr. Trump is proposing, which the CRFB estimates will cost almost $5 trillion over the next 10 years.
Mr. Trump’s proposal is getting pushback from Wall Street, with the trade group American Investment Council urging the new administration to preserve the tax break.
“We encourage the Trump Administration and Congress to keep this sound tax policy in place and unleash more long-term investment that supports jobs, workers, small businesses, and local communities,” said Drew Maloney, CEO of the American Investment Council, in a statement to CBS MoneyWatch.
The private equity industry has invested more than $5.6 trillion in the U.S. economy since Mr. Trump’s 2017 Tax Cuts & Jobs Act, Maloney noted.
Ending the loophole would put investment managers on the same tax footing as middle-class workers, Kass of the Americans for Tax Fairness said
“The time for repeal is long overdue,” Kass said. “We can’t allow loopholes like this to persist as income and wealth inequality continues to intensify.”
