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Financial Planning > Tax Planning

52 Groups Press Senate to Close Carried Interest Tax Loophole

By Melanie Waddell

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More than 50 organizations on Wednesday urged Senate leadership to support Sen. Tammy Baldwin’s Carried Interest Fairness Tax Act in the current budget negotiations. Baldwin’s bill would close the carried interest loophole exploited by hedge funds—a move backed by Republican presidential candidates Donald Trump and Jeb Bush as well as Democrat Hillary Clinton and Vermont Sen. Bernie Sanders.

In their letter, the 52 groups—which includes left-leaning groups like the AFL-CIO and Americans for Financial Reform – state that the Carried Interest Fairness Act, S. 1686, introduced by Baldwin, D-Wis., on June 25, would generate $15.6 billion over 10 years, according to the Joint Committee on Taxation.

Baldwin told Senate leaders in her October letter that in addition to President Barack Obama, closing the loophole has been proposed by Republican tax writers—including former House Ways and Means Committee Chairman Rep. David Camp, R-Mich.–and “prominent members of the investment management community.”

The Administration and Congress are now hashing over how to keep the budget funded after Dec. 11. Obama has said that he will not sign another short-term continuing resolution that’s currently funding the government until Dec. 11. Besides budget talks, Congress also must vote on whether to raise the debt ceiling by Nov. 5.

(Democratic presidential candidate Sanders, I-Vermont, is already a co-sponsor of Baldwin’s bill; Clinton, the current democratic presidential frontfronner, has also vowed to close the carried interest loophole).

Baldwin’s Carried Interest Fairness Tax Act would close a loophole allowing fund managers to classify their income as long-term capital gains, which is taxed at a top rate of 20%, instead of wage income, which is taxed at a top rate of 39.6%. (Neither number includes Medicare taxes on investments and wages.)

The 52 groups wrote in their letter that as Congress works to find “offsets that are supported across party lines, funding from closing the carried interest loophole could help pave the way for a budget deal that would allow for increased investments in programs that support middle-class economic growth.”

The groups urged Senate leaders to sign Sen. Baldwin’s letter requesting that they use revenue from closing the carried interest loophole to “raise budget caps above harmful sequester levels,” and that they cosponsor her legislation.

The carried interest loophole is “an egregious violation of the principle of tax fairness,” the groups state, as it allows investment managers at hedge funds and in private equity to pay the lower capital gains rate of 20% (plus an additional 3.8% investment tax paid for the Affordable Care Act) on the portion of their earnings known as carried interest.

“Since these fees are compensation for services, this income should be taxed as ordinary income just like the compensation others earn from work,” the group say. “If this compensation were taxed at the ordinary income tax rate these wealthy investment managers would be taxed at the top rate of 39.6%. Instead, the carried interest loophole helps some of the wealthiest Americans pay a lower effective tax rate than some middle-class workers, such as nurses, engineers, and law enforcement workers.”

The loophole, the groups argue, “plays an important role in the growing gap between the richest 1% and everyone else in America.” They state that the top-25 hedge fund managers earned a total of $11.6 billion in 2014—what has been called “a ‘bad’ year” compared to the $21.2 billion earned in 2013.

By comparison, the groups write, “the country’s 158,000 kindergarten teachers earn about $8.5 billion a year in total.”

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