Private Equity’s Favorite Tax Break May Be in Danger
President Biden is weighing an end to the carried interest loophole.
Closing loopholes
President Biden is expected to unveil a $1.5 trillion “human infrastructure” plan next week that will focus on education, child care and paid leave for workers, among other things. It would be paid for in part by new taxes on the rich, including the end of a tax break that lawmakers have tried to eliminate for years.
The White House will propose a major change to capital gains taxes, with people earning more than $1 million per year paying the top marginal tax rate on their investment gains. Mr. Biden wants to raise that rate to 39.6 percent.
The carried interest loophole might finally disappear. Profits earned from funds owned by real estate investors and managers of private equity and venture capital firms are taxed as capital gains at about 20 percent, instead of as regular income, which is taxed at more than double that rate when state levies and other taxes are taken into account.
- Financial industry executives and their lobbyists have long asserted that carried interest merely represents a return on investment, not income, an argument that survived challenges as recently as 2017. (Here’s Andrew back in 2007 writing about how lawmakers were trying, unsuccessfully, to end the “longstanding, but little understood, practice.”)
- In a 2015 DealBook Op-Ed, the law professor Victor Fleischer, a top proponent for raising taxes on carried interest, estimated that such a move could raise $180 billion.
- In a 2011 Times Op-Ed, Warren Buffett decried the treatment of carried interest, which allowed him to report a lower tax rate than his secretary. A minimum tax on millionaires was proposed shortly thereafter and dubbed the “Buffett rule.”
- JPMorgan Chase’s Jamie Dimon has been a regular critic of carried interest, even though it benefits many of the bank’s clients. In his latest letter to shareholders, he said it could be seen as “another example of institutional bias and favoritism toward special interest groups.”
Other changes to the tax code could be in the works, including to the estate tax. Private equity executives are also worried that the Biden administration may limit the tax deductibility of corporate interest payments, which would be another hit to their business model.
Stocks fell on news of the potential capital gains tax change, but futures are up today. Some in Washington believe any tax proposals will get watered down, particularly given Democrats’ slim margin of control in Congress. And the potential changes to the capital gains tax would affect only the 0.3 percent of Americans who reported annual incomes of $1 million or more, according to the latest IRS data.
- Several Republican senators suggested they may be on board with eliminating some business tax loopholes. The White House wants that tax revenue to fund the infrastructure bill it unveiled last month. But another group of Republican senators yesterday proposed a much smaller infrastructure bill — $568 billion, versus Mr. Biden’s $2.3 trillion — that would do away with any corporate tax increases.