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There’s A Loophole In The Proposal To Close The Carried Interest Loophole

A tax loophole used by financial managers to cut their tax rates in half may not be on the chopping block like President Donald Trump implied on the campaign trail, U.S. Treasury Secretary Steve Mnuchin said earlier this week.

Taxes, tax reform, carried interested, 1031, tax

The carried interest tax break could remain in place for companies that create jobs but go away for hedge fund managers, Mnuchin said during an event in Kentucky with Senate Majority Leader Mitch McConnell, Bloomberg reports

“What we are focused on is there are many other types of funds that do create jobs, and we want to make sure we don’t discourage investment,” Mnuchin said. 

Carried interest, which has been a part of U.S. law for over 50 years, was originally envisioned as a tax incentive for long-term investments. The idea came from recognizing the financial risk in early investments, constructing new buildings and building businesses.

But critics claim it is being abused.

'Getting Away With Murder'?

The carried interest tax break allows investment fund managers to pay a reduced rate for ordinary income because the fund’s profit is treated as capital gains. The tax rate for capital gains is as low as 20% instead of the 39.6% top tax rate on regular income. 

Because most hedge fund managers are paid based on the performance of the funds as opposed to a regular salary, their annual income is taxed at the lower capital gains rate, angering critics who feel such high earners should not be taxed less than those who make far less.

Trump previously said these managers were “getting away with murder.

Despite the president’s admonishment on the campaign trail, the Trump administration’s initial tax plan outline released in April included no mention of eliminating carried interest. Trump’s ties to hedge fund managers, such as former Goldman Sachs executive Mnuchin, led critics to believe nothing would change regarding the lower tax rate. 

While some of Trump’s Wall Street supporters might not support the change in the tax code, the Treasury Department remained open to the idea. Raising the carried interest tax rate to that of ordinary income is estimated to bring in $15B in new revenue over 10 years, according to the Tax Foundation, a Washington-based tax policy organization. 

“On private equity everything is on the table,” Treasury Department spokesman Tony Sayegh said to Bloomberg. “I would not say that decision has been made.”