During his campaign, Donald Trump promised to eliminate a tax loophole that enables some wealthy investors to significantly reduce their tax burdens.
“The hedge fund people won’t have as favorable feelings towards me as they do now. I know all of them, but they will have to pay more,” he stated in a 2015 Republican debate hosted by UJ. “I know individuals earning enormous sums while paying almost no taxes, and I find that unjust.”
However, the “carried interest” provision remains largely unchanged in both the House and Senate tax proposals currently being evaluated.
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Contrary to common belief, the carried interest provision primarily favors private equity and real estate managers rather than hedge fund managers. This provision allows them to pay a reduced tax rate of only 20% on investment profits allocated to fund managers, in contrast to the standard rate approaching 40% for individuals in the highest tax bracket.
Trump himself remarked that those profiting from this provision were “getting away with murder.”
“They select a stock and suddenly they earn substantial amounts. I want the hedge fund managers to contribute more taxes,” he expressed.
Nonetheless, the only alteration proposed regarding the carried interest provision in either bill is that, to qualify for the lower tax rate, the duration for holding investments must increase from one year to three.
However, according to Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, those who benefit from the carried interest provision generally retain their investments for significantly longer than three years.
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“It’s a disgrace,” he commented. “This is merely a superficial change intended to give the appearance that action is being taken concerning carried interest, when in reality, nothing is being done.”
The nonpartisan Joint Committee on Taxation, which monitors the effects of legislation, predicts that the proposed change would yield just $1.2 billion in additional revenue over a decade, averaging $120 million annually.
The JCT’s evaluation reaffirmed that changes to the law concerning carried interest “amount to a bad joke,” tweeted University of San Diego law professor Victor Fleischer. He jokingly suggested that taxing just a handful of leading private equity managers at the top rate of 39.6% could generate more revenue.
In contrast, a recent proposal by Democrats aimed at closing the carried interest loophole was projected to enhance tax revenues by $17 billion over ten years, with an anticipated $1.6 billion increase in the first year.
UJ (New York)
First published November 27, 2017: 10:13 AM ET
