Despite Trump Campaign
Promise, Billionaires’ Tax Loophole Survives Again
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| "This is what my base voters get...and they're too stupid to notice" |
“They’re paying
nothing, and it’s ridiculous,” Trump said in August 2016. “These are guys that
shift paper around and they get lucky.” They were, he concluded, “getting
away with murder.”
As recently as late
September, his chief economic adviser, ex-Goldman Sachs executive Gary Cohn,
insisted that the administration was set on closing what’s also referred to as
the “hedge-fund loophole,” though hedge funds profit from it less than
private-equity firms. “The president remains committed to ending the carried
interest deduction,”
Cohn told CNBC. “As we continue to evolve on the framework, the president has made it clear to the tax writers and Congress. Carried interest is one of those loopholes that we talk about when we talk about getting rid of loopholes that affect wealthy Americans.”
Cohn told CNBC. “As we continue to evolve on the framework, the president has made it clear to the tax writers and Congress. Carried interest is one of those loopholes that we talk about when we talk about getting rid of loopholes that affect wealthy Americans.”
Yet the sweeping tax
legislation released by House Republicans leaves the treatment of carried
interest untouched.
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A private equity mogul
lauded for patriotic donations has quietly worked to protect one source of his
wealth — the carried-interest loophole.
The preservation of
the loophole is only the latest and starkest example of how a policy that is
increasingly attacked as unfair and unjustified by people on both sides of the
aisle has managed to survive through the influence of its
well-placed beneficiaries.
When it comes to the
new tax bill, that influence surely included Stephen Schwarzman, chief
executive of the Blackstone Group, one of the largest private-equity firms in
the country.
In 2010, when Congress, then controlled by Democrats, came close to closing the loophole, Schwarzman compared the proposal to the Nazi invasion of Poland. (He later apologized.)
Schwarzman alone is estimated to have saved close to $100 million per year as a result of the treatment of carried interest, which makes up the vast bulk of his roughly $700 million annual income in recent years.
In 2010, when Congress, then controlled by Democrats, came close to closing the loophole, Schwarzman compared the proposal to the Nazi invasion of Poland. (He later apologized.)
Schwarzman alone is estimated to have saved close to $100 million per year as a result of the treatment of carried interest, which makes up the vast bulk of his roughly $700 million annual income in recent years.
A major longtime donor
to Republican candidates, Schwarzman did not give directly to Trump during the
2016 campaign, when Wall Street giving was in fact heavily tilted toward
Hillary Clinton, even though she vowed to go even further in closing the loophole
than Trump did. But Schwarzman quickly emerged earlier this year as a leading and highly influential advisor to Trump.
The loophole dates to
almost a century ago, in the tax treatment of profits from oil-drilling
partnerships, but its cost to the Treasury has exploded only in the past couple
decades with the boom in the private equity industry.
Those who manage the investments in private-equity funds are typically compensated in two different ways: with a 2 percent fee on the funds under management, and with a 20 percent cut of the gains they produce for investors — their “carried interest.”
That 20 percent cut is taxed under the capital gains rate, which currently amounts to 23.8 percent for the wealthy, instead of at the top rate for ordinary income, 39.6 percent, even though it is, essentially, part of the compensation that these investment managers are receiving for their labor, which is managing other people’s money.
Those who manage the investments in private-equity funds are typically compensated in two different ways: with a 2 percent fee on the funds under management, and with a 20 percent cut of the gains they produce for investors — their “carried interest.”
That 20 percent cut is taxed under the capital gains rate, which currently amounts to 23.8 percent for the wealthy, instead of at the top rate for ordinary income, 39.6 percent, even though it is, essentially, part of the compensation that these investment managers are receiving for their labor, which is managing other people’s money.
The loophole has also
been very valuable to partners in large-scale real estate investment — such
as Trump himself. Estimates of the loophole’s total cost
to the Treasury range from $1 billion per year to more than $10 billion.
Defenders of the
loophole — who reject even the term “loophole” — have long argued that applying
the lower capital gains rate to carried interest justly rewards the risk-taking
involved in private-equity partnerships.
But in recent years, even some people within the industry have grown more muted in their defense, as the loophole has become increasingly implicated in soaring incomes at the very top of the ladder.
But in recent years, even some people within the industry have grown more muted in their defense, as the loophole has become increasingly implicated in soaring incomes at the very top of the ladder.
For instance, David Rubenstein, the co-founder of another very large private equity firm, the Carlyle Group, in recent years has shifted from explicitly defending the loophole to rebuffing legislative attempts to close it by arguing that it would be better addressed as part of comprehensive tax reform.
“I don’t think anything will get done until comprehensive tax reform is discussed and everything’s looked at,” Rubenstein told this reporter in October 2015, at a New York event where he was being honored for his philanthropy.
That was an effective
way to defer focused efforts to eliminate the tax break, without appearing to
defend it outright. And now a comprehensive tax reform bill is finally on the
table. And closing the loophole is not in it.
Alec
MacGillis covers politics and
government for ProPublica.