Carried Interest on the Stump and Hill (Sep. 24)

 Mike & Co. –

Discussions on the budget are moving from dollars for now to fine terms.  The current issue is that House Democrats want the CR to last only through November but McConnell’s bill would it extend to mid-December.  More on this again later in the week.
A quick look now at some ramifications of Jeb Bush’s carried interest proposal that are getting attention, now that over half the presidential field had endorsed closing the loophole within a few days after Jeb did so two weeks ago.  Before the GOP can sue for peace on the issue and neutralize it, there is that one little caveat these candidates are citing.

Dana

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Jeb Bush’s proposal on September 8 to close the loophole on carried interest caught notice and has generated a split amongst Republican candidates and activists.  The decades-old loophole allows some hedge fund managers and others to treat a large portion of their fee income as capital gains, which are taxed at a lower rate than regular income.

Bush joined Donald Trump in taking this position and in last week’s GOP debate, Govs. Jindal and Pataki and Sen. Santorum then vowed to scrap the tax benefit, with a caveat, though — all three proposed to eliminate it as part of a broader tax code revamp that would bring down rates.  Sen. Paul said he would “get rid of all tax loopholes” under his flat tax plan.  Gov. Kasich bucked the trend, saying he doesn’t favor scrapping carried interest “at this point.” Mike Huckabee said that “we ought to get rid of all the taxes” on earnings.  Grover Norquist and others have labeled the proposal a “tax hike.”

Whether or not ending the provision amounts to a tax increase for its beneficiaries depends on the details.   Bush, for example, has proposed a top income tax rate of 28 percent, which would result in a slight tax increase, whereas Sen. Santorum’s 20 percent flat tax would result in managers paying less at, even without the carried interest provision — his is a self-contained  revenue neutral version.

Industry pushback has been familiar if overblown for a loophole that saves taxpayers less than $2 billion per year.  Real Estate Roundtable President and CEO Jeffrey D. DeBoer:  “Rewarding entrepreneurs who risk more than just their cash is at the heart of the American economic model. It is what capital gain and, in fact, ‘carried interest’ are all about – and it is not limited to rich hedge fund or private equity managers. Increasing the tax on carried interest capital gain… would have far-reaching consequences for nearly every real estate partnership in the country, productive investments would be altered dramatically, and jobs would suffer.”

For the moment, there is no legislative effort to close the loophole on the Hill.  Per a senior GOP House leadership staffer, the idea of bringing the issue into the budget debate “is non-starter for the conference.”  We will not likely see an end to the provision during this Congress.  And meanwhile you will also see Republican candidates reiterate their support for the proposal — though only the context of broader tax reform.  No one wants to be seen as supportive of raising taxes in a Republican primary.

But yesterday, Sen. Warren and three co-signers, Sens. Franken, Baldwin, and Whitehouse, sent a letter to the IRS applauding of the agency’s recent decision to go after income from carried interest and other management fees that the IRS has previously granted tax waivers.  The letter praised the IRS for “combat[ing] this sort of abuse.”  The tax agency proposed a rule in July that would treat hedge fund compensation from management fees converted to investments as taxable income rather than capital gains.

“This is music to the ears of [us] Democrats,” added Sen. Chuck Schumer, who for years had actually supported the carried interest provisions but said this week that he now supports eliminating the preference for private equity fund managers, dropping an earlier objection to any legislation that did not also eliminate the break for real estate and energy partnerships, on the grounds that such legislation singled out one industry.

Momentum on the issue has shifted swiftly and it is likely to come up in the Democratic debates as well.   But we will not likely see legislation on it (though it may do a cameo as a $18 billion yen-year pay-for proposal).  Nor will we see GOP candidates embrace it as a standalone solution.  Still, the jeannie is out of the bottle and it seems that the loophole has become low-hanging fruit, or red meat.

 

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