It’s time for Congress to close the carried interest loophole
With ongoing negotiations among Democrats regarding key provisions in President Joe Biden’s Build Back Better Agenda that would increase taxes on wealthy individuals, investors, and corporations, infighting is blocking one of the most meaningful reforms that Congress could make to the tax code: closing the “carried interest” loophole that allows executives in private-equity asset management firms to pay a lower tax rate than most Americans.
The top marginal federal income tax rate is currently 37 percent, yet thanks to the carried interest loophole, the income that private equity and venture capital managers get from their clients is not taxed as income, but instead treated by the IRS as long-term capital gains with a top rate of just 20 percent. For the private equity industry, and their supporters in Congress, treating investment management fees paid by investors in private equity and venture capital funds like everyone else’s income is anathema, so they are fighting tooth and nail to preserve their privileged treatment under the tax code.
Closing the carried interest loophole could raise $180 billion over ten years. That’s $180 billion that could go toward supporting vulnerable Americans and investing in America’s future. Instead, Democrats like House Ways and Means Committee Chairman Richard Neal (D-Mass.) are carrying water for wealthy investment managers and preventing the kind of tax reform our country desperately needs.
Neal and the industry lobbyists maintain that closing the carried interest loophole would have a devastating impact on the private equity industry, and, by extension, harm the U.S. economy. Their implication is that there is such a shortage of people to be fund managers that we need special tax incentives to get more people to go into that line of work. That is not the case. There could be a case for giving people going into nursing a special tax break, but not people becoming Wall Street fund managers.
Even JPMorgan Chase’s Jamie Dimon has come out against the loophole in his latest letter to shareholders, calling it “another example of institutional bias and favoritism toward special interest groups.”
With the majority of Americans in support of tax hikes for the rich and influential business leaders like Dimon pushing back against the carried interest loophole, one has to wonder why any Democrat would oppose closing the loophole. Instead of protecting their wealthy donors’ special tax loopholes, Democrats opposing this change should focus on serving the best interests of the majority of voters who put them in office.
As Democrats continue negotiating the tax side of the Build Back Better agenda, there should be a greater focus on the proposal introduced by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Sen. Sheldon Whitehouse (D-R.I.) that would completely eliminate the carried interest loophole. This is clearly better than the alternative plan that Democrats are considering, a proposal out of Neal’s Ways and Means Committee would only require private equity firms to hold assets for slightly longer in order for their managers to qualify for carried interest, an almost insultingly small change to a massive problem. In contrast, Wyden and Sheldon’s proposal is sensible and would help address concerns by moderate Democrats like Sen. Joe Manchin (W.Va.) about how to fund Biden’s spending plan.
This clearly isn’t the largest problem in our tax code that Democrats should be tackling (the preferential tax treatment of actual capital gains, as opposed to fund manager incomes that they pretend is capital gains, is a much larger contributor to inequality), but this loophole is instructive in the clarity it provides. There is truly no economic justification for its existence, and virtually everyone in a position of power agrees that it should be eliminated. Yet it persists as living evidence that lawmakers in Washington don’t have what it takes to stand up to the private equity industry.
The American people deserve better. What American families need right now are lawmakers willing to prioritize them over the millionaires and billionaires who make up the private equity industry. Facing this historic opportunity for tax reform, that will require Democrats in Congress to find the courage to stand up to special interests by ending their special treatment.
Morris Pearl is chair of the Patriotic Millionaires and former Managing Director at BlackRock.
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