Despite Trump’s vows, GOP’s tax plan leaves loophole intact
The tax-overhaul plan unveiled Thursday by House Republicans would leave intact a loophole that benefits hedge funds, private equity funds and other investment managers, despite President Donald Trump’s campaign promises to eliminate it.
The proposal collapses several individual income tax brackets, slashes the corporate tax rate, targets income held overseas by companies and caps a popular deduction for mortgage interest. But while it eliminates many deductions and loopholes, the plan preserves the carried-interest provision — a section of the tax code that is beloved by, and hugely valuable to, private-equity and other Wall Street investors.
A substantial portion of the compensation of hedge-fund and privateequity executives is derived from the investment gains their funds generate. Under the current tax code, that compensation is treated as capital gains, meaning it is taxed at a rate of 23.8 percent, well below the 39.6 percent incometax rate that now applies to the top tier of individual earners.
Democrats and some Republicans have long pushed to end the carriedinterest provision and to stop treating this income tied to it as investment profits for tax purposes. They argue it is an unwarranted tax break for the richest of the rich.
The push has angered many people on Wall Street.
“It’s like when Hitler invaded Poland in 1939,” Stephen Schwarzman, the chief executive of Blackstone Group, one of the world’s largest privateequity firms, declared in 2010. He later apologized for making what he said was an “inappropriate analogy.”
During the presidential campaign, Trump called for closing the loophole. He called hedge-fund managers “paper pushers” who were “getting away with murder” partly because of measures including the carried-interest provision that he said allowed them to shield their wealth and to minimize their tax burdens.
Trump did not mention the carried-interest provision in his remarks about the tax plan while meeting with House Republicans at the White House on Thursday.
Steven Mnuchin, the Treasury secretary, is a former hedge-fund manager, as is John Paulson, who helped guide Trump during the campaign. Schwarzman is a friend of Trump’s who has advised him on economic issues. Wilbur Ross, the Commerce secretary, is a billionaire, who founded his own privateequity firm.
Wall Street had lobbied hard to preserve the tax break, and cheered the House Republicans’ decision to leave it untouched. Bobby Franklin, chief executive of the National Venture Capital Association, said in a statement that he was “pleased the House Ways and Means Committee heard our message and is preserving several issues important to the entrepreneurial ecosystem.”
Spokesmen for the White House and House Republicans did not immediately respond to requests for comment.