During his campaign, Donald Trump promised to eliminate a tax loophole that allows wealthy investors to reduce their tax liabilities.
“The hedge fund executives won’t be as fond of me after I take action. I know them well, but they will contribute more to taxes,” he stated in a Republican debate hosted by CNN in 2015. “I know individuals earning massive amounts of money while paying hardly any taxes, which is unfair.”
However, the tax advantage known as the “carried interest” provision remains largely unchanged in the tax bills being debated in both the House and Senate.
Related: Here’s what’s included in the tax reform bill approved by Republicans
Contrary to popular belief, the carried interest provision primarily benefits private equity and real estate managers rather than hedge fund managers. It allows them to pay a reduced rate of 20% on investment earnings distributed to fund managers, compared to the nearly 40% standard rate for top earners.
Trump himself characterized beneficiaries of this tax break as “getting away with murder.”
“They select a stock and suddenly profit immensely. I want hedge fund managers to contribute more taxes,” he remarked.
Up to now, only one amendment regarding the carried interest provision appears in either proposed bill. The suggested reforms would mandate that to receive the lower rate, investments must be maintained for three years, up from the current one-year requirement.
Yet experts like Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, point out that those benefiting from the carried interest provision generally hold their investments for far longer than three years.
“That’s a disgrace,” he stated. “This is a superficial modification intended to create the illusion that something significant is being done regarding carried interest when, in reality, nothing changes.”
The nonpartisan Joint Committee on Taxation, which monitors the effects of legislation, estimates that this change would yield only $1.2 billion in revenue over the 10 years from 2018 to 2027, averaging $120 million annually.
JCT’s assessment reinforces that the alteration to the law “on carried interest is a poor joke,” tweeted Victor Fleischer, a law professor at the University of San Diego. He humorously suggested that simply taxing a few top private equity executives at the higher 39.6% rate would yield greater revenue.
