Mnuchin Backpedals on Tax Loophole That Helps Billionaires
President Trump campaigned to eliminate the “carried interest” loophole used by financial managers to lower their taxes, but like many other campaign-trail pledges, it looks as if this one won’t become a reality.
U.S. Treasury Secretary Steven Mnuchin said at a press event Monday evening that the Trump administration will not close that loophole for most Wall Street billionaires, saying that it can remain for firms that “create jobs.”
“We will close the loophole for hedge funds in carried interest,” Mnuchin said at an event in Louisville, Kentucky, where he appeared alongside Senate Majority Leader Mitch McConnell. “What we are focused on is there are many other types of funds that do create jobs and we want to make sure we don’t discourage investment.”
The so-called carried interest loophole enables investment-fund managers to pay a tax rate as low as 20 percent — roughly half the top rate for ordinary income — on much of their income. Trump highlighted the carried-interest tax break during his populist presidential campaign, labeling some hedge fund managers as “paper pushers” who are “getting away with murder.”
The Trump administration tax proposal, released in April, was called “thin in details” by The New York Times, which pointed out the lack of information on how carried interest would be taxed. The Times also noted that the president’s plan could help fatten private equity execs’ wallets:
Several tax experts and Wall Street lawyers said that by not mentioning the matter at all, the administration seemed to be signaling that the tax proposal would effectively eliminate the unique taxation of carried interest.
That does not mean carried interest would be taxed at a higher rate than it is today. Instead, experts say, the tax rate for carried interest may well go down.
That reading is based on the proposal subjecting pass-through entities — which include partnerships like private equity firms and hedge funds — to a 15 percent tax rate, which is lower than the rate on capital gains and much lower than the top rate on ordinary income.
In other words, it appears that if the Trump plan is enacted, private equity executives would not just avoid higher taxation; their taxes would actually decline.
Thus, hedge fund and private equity managers would have avoided any real-world consequences of Trump’s populist campaign promises to have carried interest taxed as ordinary income instead of capital gains.
Former White House chief of staff Reince Priebus was quick to speak to concerns about the lack of mention of carried interest in the tax plan, insisting at the time that “[c]arried interest is on the table” and that “[t]he president wants to get rid of carried interest so that balloon is not going to stay inflated very long, I assure you of that.”
While the president might believe that leaving the loophole for firms that “create jobs” is effective rhetoric, particularly for 1 percenters, some among that demographic have already disagreed. Patriotic Millionaires, a group of high-net-worth Americans “united in their concern about the destabilizing concentration of wealth and power in America,” claimed Wednesday in a press release that the remaining loophole would cover “most Wall Street billionaires, including the vast majority of private equity and real estate fund managers.” Morris Pearl, the chair of the Patriotic Millionaires and a former BlackRock executive, said in the release:
Secretary Mnuchin’s friends in private equity are rejoicing today, as the U.S. Treasury is now parroting industry talking points about their alleged benefit to U.S. workers. Hundreds of thousands of pink slips tell the real story. Furthermore, there is no intellectually justifiable reason why fund managers – who do not actually invest their own capital – should pay half the tax rate of Americans who actually work for a living. Mnuchin’s statement either proves a profound lack of understanding of the difference between being an investor and being an investment manager (doubtful) or a calculated political ploy designed to appease BOTH Trump’s base and Wall Street billionaires like David Rubenstein. It is past time for this country to have a public debate on the carried interest loophole. If you want to know who will stand up for working Americans and who won’t, look no farther than the politician’s position on the carried interest loophole. It will tell you everything you need to know.
“We believe strongly that not one penny go to the top 1 percent and that any tax reform must be deficit neutral,” Senate Minority Leader Chuck Schumer remarked about the conditions for Democratic support of Republican tax legislation. “When Republicans figure out what they want to do, we’d be happy to work with them if they can agree on these broadly supported principles.”