What You Need to Know
- Wyden's bill closes the entire loophole: private equity managers will no longer be able to defer paying tax for years, if not decades, Wyden said.
- The Joint Committee on Taxation estimates that the proposed legislation would raise $63 billion over 10 years.
- The bill ends one of the most indefensible loopholes in the tax code allowing wealthy private equity managers to be taxed at lower rates, Wyden said.
Senate Finance Committee Chairman Ron Wyden, D-Ore., and Sen. Sheldon Whitehouse, D-R.I., have introduced legislation to close the carried interest loophole, ending a tax dodge for wealthy private equity and hedge fund managers.
Presented Thursday, Wyden and Whithouse’s bill would close the entire carried interest loophole — including the recharacterization of income from wage-like income to lower-taxed investment income and the deferral of tax payments.
“One of the most indefensible loopholes in the tax code allows wealthy private equity managers to be taxed at lower rates than nurses treating COVID patients and avoid paying any tax year after year after year. This is an issue of fairness,” Wyden said in a statement.
“Importantly, my bill closes the entire loophole — private equity managers will no longer be able to defer paying tax for years, if not decades. Nurses treating COVID patients can’t defer paying taxes for years — neither should the private equity managers,” he explained.
Previously introduced bills, according to Wyden, only “address half of the problem — recharacterization of income.”
The Joint Committee on Taxation estimates that Wyden’s bill would raise $63 billion over 10 years, whereas previously introduced bills that did not address the deferral of tax payments would raise just $15.6 billion over 10 years.
“Americans have had enough of hedge fund tycoons using this special carve out to pay lower tax rates than their drivers,” Whitehouse said in a statement. “We need to rebuild our tax code to guard against the ultra-rich and corporations scheming to avoid paying their fair share. Our bill is a good place to start.”
To prevent the recharacterization of income, fund managers would be required to recognize annual compensation that would be taxed at ordinary income rates and subject to self-employment taxes, the two senators say.
“Annual compensation would be determined using the estimated forgone interest on an implicit interest-free loan from investors to the fund manager at a prescribed interest rate,” according to a summary of the bill.
To end the deferral of tax payments, the bill treats transactions between fund managers and investors as occurring outside the partnership, decoupling compensation from future sales of investments and ensuring the value of the fund manager’s carried interest is taxed from the outset, the lawmakers state.