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senate Bill S. 1686

Eliminating Tax Advantages for Investment Fund Managers

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.

sethkenvin's Opinion
···
08/06/2016
Capital is taxed at a lower rate than labor. I'm not in favor of that, but carried interest is the main upside income that fund managers make as reward for their labor -- it's not connected to their personal capital. It's fairly wonky, but not impossible to explain, so I'll try with an example. Let's say that an investor puts $10 million in a fund, and ultimately, after several years, the investment winds up worth $15 million, so it gained $5 million (15-5). 20% is a fairly standard carried interest percentage. So if so in this example, the fund managers get rewarded with $1 million dollars (20%x $5mil). The investors wind up with $14 million, a $4 million capital gain, so the investor pays tax on those $4 million at the long term capital gains rate, which is lower than the ordinary income tax rate. The rational is that this investor fueled the economy, with societal benefit, by patiently putting precious capital at risk towards productive purposes. The fund managers, without putting any capital at risk, make claim 1/5 of the fund's profits, $1 million in this example, as compensation for their efforts (i.e. "labor") yet under current laws they preposterously benefit by paying the lower cap gains rate on this clearly ordinary income. It's the reward for their work, and not for returns on capital they personally inject & correspondingly not for any risk they take -- fund managers pull 20% of profits but their investors would suffer 100% of losses on bad investments. That riskless profit by fund managers should not be taxed more favorably than compensation for other jobs in this country.
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John's Opinion
···
08/05/2016
Even Donald Trump said, "these hedge fund guys are getting away with murder." Indeed, these mega rich vultures need to pay their fair share. I won't lose sleep if they have to downgrade from an 80 ft yacht to a 50 ft one
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Adam's Opinion
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08/04/2016
This is not a perfect bill, and there still needs to be more done across the tax board. But this is a start.
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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.

operaman's Opinion
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08/04/2016
No. Eliminate Capital Gain Taxes. Support Capitalism. Why is our Government always after someone's money? Always looking for more Socialism to support the masses while they themselves skim off high salaries.
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SherryTX's Opinion
···
08/04/2016
My no vote is centered on two issues. #1 based on the information provided, the tax category is appropriate. There is risk involved and investment so this isn't salary. It shouldn't matter what income bracket one is in, the facts prevail. #2 Getting rid of our complicated tax system and going to a flat tax would eliminate anything perceived as a loophole and put everyone on the same footing. The flat tax would fix all this and no longer give the IRS the advantage to penalize people for violating tax law that no one even knows about.
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Wes's Opinion
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08/04/2016
As I feel the income tax should be repealed and a consumption tax, "Fair Tax" should be adopted, I cannot support this bill.
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What is Senate Bill S. 1686?

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.

Impact

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

Cost of Senate Bill S. 1686

A CBO cost estimate is unavailable.

More Information

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:

“Instead of simply rewarding the wealthy with tax preferences, Washington needs to do more to respect hard work, invest in economic growth, and give the middle class a fair shot at getting ahead. At a time when too many Wall Street millionaires pay a lower effective tax rate than some truck drivers, teachers and nurses, we need to eliminate this loophole and make sure those at the top are paying their fair share.”

The Senate considered this legislation as an amendment to an education reform bill in July 2015 and it was rejected on a 43-55 vote, with one Democrat and one Independent joining all Senate Republicans in opposition. This legislation is cosponsored by nine Senate Democrats and Sen. Bernie Sanders (I-VT).


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)

AKA

Carried Interest Fairness Act of 2015

Official Title

A bill to amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of personal service income earned in pass-thru entities.

bill Progress


  • Not enacted
    The President has not signed this bill
  • The house has not voted
  • The senate has not voted
      senate Committees
      Committee on Finance
    IntroducedJune 25th, 2015
    Capital is taxed at a lower rate than labor. I'm not in favor of that, but carried interest is the main upside income that fund managers make as reward for their labor -- it's not connected to their personal capital. It's fairly wonky, but not impossible to explain, so I'll try with an example. Let's say that an investor puts $10 million in a fund, and ultimately, after several years, the investment winds up worth $15 million, so it gained $5 million (15-5). 20% is a fairly standard carried interest percentage. So if so in this example, the fund managers get rewarded with $1 million dollars (20%x $5mil). The investors wind up with $14 million, a $4 million capital gain, so the investor pays tax on those $4 million at the long term capital gains rate, which is lower than the ordinary income tax rate. The rational is that this investor fueled the economy, with societal benefit, by patiently putting precious capital at risk towards productive purposes. The fund managers, without putting any capital at risk, make claim 1/5 of the fund's profits, $1 million in this example, as compensation for their efforts (i.e. "labor") yet under current laws they preposterously benefit by paying the lower cap gains rate on this clearly ordinary income. It's the reward for their work, and not for returns on capital they personally inject & correspondingly not for any risk they take -- fund managers pull 20% of profits but their investors would suffer 100% of losses on bad investments. That riskless profit by fund managers should not be taxed more favorably than compensation for other jobs in this country.
    Like (23)
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    No. Eliminate Capital Gain Taxes. Support Capitalism. Why is our Government always after someone's money? Always looking for more Socialism to support the masses while they themselves skim off high salaries.
    Like (32)
    Follow
    Share
    My no vote is centered on two issues. #1 based on the information provided, the tax category is appropriate. There is risk involved and investment so this isn't salary. It shouldn't matter what income bracket one is in, the facts prevail. #2 Getting rid of our complicated tax system and going to a flat tax would eliminate anything perceived as a loophole and put everyone on the same footing. The flat tax would fix all this and no longer give the IRS the advantage to penalize people for violating tax law that no one even knows about.
    Like (22)
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    Share
    Even Donald Trump said, "these hedge fund guys are getting away with murder." Indeed, these mega rich vultures need to pay their fair share. I won't lose sleep if they have to downgrade from an 80 ft yacht to a 50 ft one
    Like (17)
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    As I feel the income tax should be repealed and a consumption tax, "Fair Tax" should be adopted, I cannot support this bill.
    Like (12)
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    This is not a perfect bill, and there still needs to be more done across the tax board. But this is a start.
    Like (10)
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    Those that make enough have to recognize that they are also not taxed enough. We need to ensure that the tax code holds those accountable and remains progressive.
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    This needs to be broader in scope, but is a good start in the right direction towards more equality
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    I support this. But I dislike the wording expressed in the question. It pushes a clearly biased agenda
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    We need to shrink the deficit and close in on the national debt. The capital gains loophole only seems to limit the government's tax revenue in an area where people (hedge fund managers etc.) can easily afford to contribute what they should be according to their tax bracket.
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    Hedge fund jerks should have pay taxes just like the rest of us. Why should multi-millionaires get treated differently? Because their multi-millionaires? Bunk!
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    The bottom line is that the United States is shooting itself in the foot. Or, to be more accurate, politicians are hobbling America’s productive sector and undermining U.S. competitiveness with senseless class-warfare taxation. And don’t forget that the United States compounds the damage with the world’s highest corporate tax rate, pervasive double taxation of dividends, and a punitive death tax. So while some countries are doing the right thing and abolishing their capital gains taxes, the United States is languishing in the international contest for more investment. The only good news is that a few other nations also impose foolish policies as well. It’s worth noting that all good tax reforms, such as the flat tax, completely abolish the capital gains tax.
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    Closing tax loopholes that benefit the ultra-rich should be a priority. The use of the tax code to benefit the wealthy is class warfare by the politically connected waged upon the public at large. While in terms of tax revenues, the benefits might be slim, politically it is a crucial first step towards recovering political power for the people.
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    If you increase the tax rate for these managers, you have to increase the capital gains tax. Therefore, taking more money out of people's 401(k)'s and IRA's. I agree that wealthy managers and firms should pay more than a lousy 10-15%; however, I don't believe we should increase taxes on people's investments and retirements. Reform the tax code as a whole, rather than trying to fix loopholes that will undoubtably lead to new ones.
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    Everyone needs to pay their Fair share
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    With how many loopholes hedge fund managers are able to exploit, this is a necessary action to ensure they are paying their fair share, adding more revenue to the government and thus reducing the deficit and most importantly: Reducing income inequality.
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    This is a good start to plugging those pesky corporate and banking loopholes.
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    DO SOMETHING FOR THE MIDDLE CLASS FOR A CHANGE. WE ARE VERY UNHAPPY RIGHT NOW.
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    Lower taxes stimulate growth, capital gains taxes should eliminated, not "redefined."
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    While I do believe that something needs to be done to close this loophole, once again, this bill is a one-off, which does not address the greater issue of taxes. The entire tax structure needs to be reformed. I am not interested in appeasing Bernie Sanders for political reasons. One may argue, at least, it is a start, but that's just it. We always have these small starts and never address the entire issue.
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