Bills
| 3.23.22

Eliminating Tax Advantages for Investment Fund Managers (S. 1020)

Do you support or oppose this bill?

What is S. 1020?

(Updated August 22, 2019)

This bill would reform the tax code by requiring managing partners (big wigs) at hedge funds and private equity firms to pay income taxes rather than long-term capital gains taxes as they earn money from “carried interest.” Basically, higher taxes than they're used to.  

What's carried interest you ask? Current law allows investment funds to be structured as a partnership by the managers, who may invest in the business and keep some of the fund’s profits as compensation. 

When the fund’s profits are long-term capital gains from investments, managers pay capital gains taxes — either 15 or 20 percent — rather than ordinary income taxes which may be up to 39.6 percent depending on their income level.

This legislation would require the carried interest income of managing partners be taxed as ordinary income rather than a capital gain. Penalties for underpayment would be increased. The bill would apply to any member of a partnership that provides the following services:

  • Advising the partnership about investing in, purchasing, or selling specific assets;

  • Managing, acquiring, or disposing of the partnership’s assets;

  • Arranging financing related to acquiring those assets.

Argument in favor

The carried interest loophole benefits the wealthiest, most politically connected Americans who use it to pay a lower effective tax rate than many ordinary hard-working Americans. Managing partners at hedge funds and private equity firms need to pay their fair share of taxes.

Argument opposed

It would set a bad precedent for Congress to enact policy targeting the compensation system of one particular industry to score political points. Plus it would be of little fiscal benefit, as $1.5 billion annually in new tax revenue doesn’t help much with a budget deficit that tops $500 billion.

Impact

Managing partners at hedge funds or private equity firms; and the IRS.

Cost of S. 1020

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Sen. Tammy Baldwin (D-WI) introduced to close what she referred to as the “carried interest loophole” and ensure that investment fund managers pay more in taxes:

“If President Trump is in fact serious about closing the carried interest tax loophole for hedge fund managers on Wall Street, we are introducing legislation to do just that and we welcome his support so he can keep the promise he has made. With his one-page tax proposal that gives massive tax cuts for millionaires and billionaires, I am afraid President Trump is breaking his promise and is engaging in a classic Washington game of bait-and-switch. He needs to stand by his word to close the carried interest tax loophole and support our legislation.”

An op-ed opposed to this bill that appeared in the Washington Examiner argued that ending the treatment of investment income from partnerships as capital gains and taxing it instead at ordinary income tax rates would result in "lost economic opportunity" exceeding the tax revenue this bill would bring in. It included the following summation from a former Heritage Foundation executive who moved on to the Brookings Institution:

"This tax hike would not only threaten the economy generally. It would also jeopardize a particularly important and crucial part of the entrepreneurial economy -- capital-intensive firms that take the risk of investing in and restructuring underperforming enterprises and putting them onto a sound footing."

This legislation is cosponsored by 13 Democratic senators.


Of Note: According to an estimate by the Joint Committee on Taxation, this bill’s identical House companion would lead to $15.6 billion in new federal income tax revenue over the 2016-2025 period. It projects that tax revenue from carried interest would peak in 2018 at nearly $2.1 billion before declining to just over $1 billion in 2025.


Media:

Summary by Eric Revell
(Photo Credit: Flickr user Eric Skiff)