Trump Targets Carried Interest Tax Loophole in New Proposal

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President Donald Trump is once again taking aim at the carried interest tax loophole, a policy feat that politicians have tried and failed to achieve for more than a decade. The loophole allows private equity and hedge fund managers to pay a lower capital gains tax rate on their share of profits. In a meeting with Republican lawmakers, Trump said closing the carried interest loophole is a priority, which could reduce the deficit by $13 billion through 2034, according to a Congressional Budget Office estimate.

The private equity industry is expected to mount fierce opposition to the proposal, arguing that the current tax treatment of carried interest is appropriate for the commitment of “sweat equity” with no guarantee of returns. The industry has worked to show that carried interest aligns the interests of investors and managers, and policymakers need to weigh the benefit of tax revenue against the risk of major disruption to a longstanding investment model. The American Investment Council said that ending carried interest would harm American businesses, capital markets, and the US economy.

Some of the largest publicly traded private equity firms, such as Apollo Global Management Inc., Blackstone Inc., Carlyle Group Inc., and KKR & Co., are sitting on billions of dollars of investments that are eligible for carried interest. The proposal has sparked concern among investment managers, who could see their compensation packages impacted. Carried interest makes up a growing portion of their compensation, and any changes to the tax treatment could reduce their earnings.

The issue has been debated for years, with both Democratic and Republican presidents attempting to end the tax break. In 2017, the Tax Cuts and Jobs Act modified the tax code, extending the holding period for assets to qualify for the capital gains rate from one year to three years. However, the latest proposal from Trump could have significant implications for the investment industry and the US economy. The National Venture Capital Association (NVCA) president and CEO Bobby Franklin said that carried interest encourages smart, high-risk investments in innovative high-growth startups, and any changes to the tax treatment could disrupt progress and harm small investors.

A list of key points related to the proposal includes:

• Carried interest is a type of compensation paid to general partners of investment funds.
• The tax break allows private equity and hedge fund managers to pay a lower capital gains tax rate on their share of profits.
• Ending the carried interest loophole could reduce the deficit by $13 billion through 2034.
• The private equity industry is expected to mount fierce opposition to the proposal.
• Carried interest makes up a growing portion of investment managers' compensation.