Private Equity Carried Interest Provision Lives On
Long the Target of Populists Railing Against Tax Loopholes for Wealthy PE and Hedge-Fund Managers, Lobbyists Win and Keep the Status QuoAugust 9, 2022
Sixty-one (61%) of Americans are now living paycheck to paycheck amid rising inflation, falling savings and a new Senate bill that spends hundreds of billions on climate and healthcare programs.
To help pay for that program, a new 15% minimum corporate income tax on large profitable companies and a 1% excise tax on companies’ stock buybacks are being proposed.
Conspicuously absent from the tax-garnering efforts is a favorite bugaboo for populists and presidents from Warren Buffet to Donald Trump: changes to the tax rate on carried-interest income.
Carried-interest income is the money private equity and hedge-fund managers get when they receive profits for the sale of investments. The income from those investments is taxed as a long-term capital gain and not at the higher rate for ordinary income.
Through the years the taxation of carried interest has become increasingly politicized and some reforms did occur, such as extending the asset-hold period from one year to three years.
According to an analysis by the Wall Street Journal and financial filings, campaign contributions from private-equity and other firms increased in 2006 to $222 million in 2020. Sen. Kyrsten Cinema (D., Ariz.), who ultimately negotiated for carried-interest to remain intact, has received $2.3 million from investment and securities executives and PACs since she first ran for the senate in 2017.
A recent Wall Street Journal editorial, The Houdinis of Carried Interest, wrote, “As an economic matter, we agree… treating carried interest like a capital gain is warranted. It is essentially risk capital, and public pension funds will benefit since they are investing more in PE funds to get higher returns.”
Then the Journal pointed out what it called “astounding hypocrisy.”
“This is the old Washington political game of threatening an industry with policy harm, extorting it for campaign cash, then failing to impose the harm. The threat lingers into the next campaign season, the industry keeps paying protection money and the cycle repeats. Mr. Schumer is probably thanking Ms. Sinema for her role in this political charade.”