WASHINGTON, DC – In an effort to restore an important measure of fairness to the tax code, U.S. Senators Jack Reed and Sheldon Whitehouse are seeking to close the “carried interest” loophole, which lets Wall Street managers at investment partnerships treat most of the money they make as capital gains rather than as ordinary income.
Reed and Whitehouse, along with U.S. Senator Tammy Baldwin (D-WI) and several of their colleagues, sent a letter to Majority Leader Mitch McConnell and Minority Leader Harry Reid, urging both leaders to include a provision to close the carried interest loophole as part of a bipartisan budget agreement.
“We are encouraged that negotiations are underway to provide Americans relief from the damaging cuts and budget caps laid out in the Budget Control Act. These indiscriminate cuts were never intended to be permanent policy and we are supportive of efforts to reach a bipartisan budget compromise. As you continue your work to find the revenue and spending cuts required to craft such a deal, we encourage you to consider including a provision to close the carried interest loophole. This long overdue tax change would raise valuable revenue to finance critical investments and prevent damaging sequester cuts,” the senators wrote in the letter. Cosigners of the letter also include: Al Franken (D-MN), Bernie Sanders (I-VT), Dianne Feinstein (D-CA), Barbara Mikulski (D-MD), and Elizabeth Warren (D-MA).
Reed and Whitehouse are cosponsors of the Carried Interest Fairness Act of 2015, which would ensure that income earned by investment managers of private equity, venture capital, and hedge funds is taxed at the same rates paid by the vast majority of Americans.
Under the current system, fund managers often get paid two percent of assets as a regular fee, plus twenty percent of the fund’s profits. The managers pay regular income tax on the two percent, but when it comes to their share of the profits, which is called “carried interest,” they usually pay at the lower long-term capital gains rate. In a sense, they are converting income from labor into capital gains. So even though the investors are putting up the fund’s capital and taking the bulk of the risk, the fund managers are able to treat their part of the fund’s earnings as a capital gain, subject only to a top taxable rate of 20 percent. Absent the “carried interest loophole,” high earning investment managers would otherwise pay up to a 39.6% tax rate.
The Carried Interest Fairness Act would clarify that this income be subject to ordinary income tax rates, rather than the lower capital gains rate.
“The tax code is broken and this is a primary example of why we need to fix it. Congress needs to close this loophole, simplify the tax code, and enact other sensible reforms that will strengthen our economy,” said Senator Reed, a senior member of the Senate Banking Committee.
“Time and again, we have seen Republicans defend every single tax code loophole, while pressing for cuts to programs that benefit middle-class families. As we once again face an unnecessary fiscal crisis, I urge Congressional leadership to generate revenue by closing some of the most egregious and indefensible tax loopholes, including the ‘carried interest’ giveaway,” said Whitehouse.
The Carried Interest Fairness Act (S. 1686) was recently estimated by the Joint Committee on Taxation to raise $15.6 billion in revenue over ten years.
Full text of the letter follows:
October 22, 2015
Dear Majority Leader McConnell and Minority Leader Reid:
We are encouraged that negotiations are underway to provide Americans relief from the damaging cuts and budget caps laid out in the Budget Control Act. These indiscriminate cuts were never intended to be permanent policy and we are supportive of efforts to reach a bipartisan budget compromise. As you continue your work to find the revenue and spending cuts required to craft such a deal, we encourage you to consider including a provision to close the carried interest loophole. This long overdue tax change would raise valuable revenue to finance critical investments and prevent damaging sequester cuts.
Allowing sequester cuts to move forward at this crucial time could do serious harm to the American economy and middle-class families. Closing the carried interest loophole would have a negligible impact on economic output, while taking a significant step towards sequester relief. The Carried Interest Fairness Act (S. 1686) was recently estimated by the Joint Committee on Taxation to raise $15.6 billion in revenue over ten years.
Closing this loophole is also advisable from a tax fairness perspective. The loophole allows investment managers to receive a 50 percent discount on the taxes they pay on their labor income. This allows many of our economy’s highest earners to pay a lower effective tax rate than our nurses, first responders, truck drivers, and teachers. This inequity in the tax code is also a driving force behind rising income inequality in the United States.
As you know, President Obama has been a long-time supporter of closing the carried interest loophole, including it in several of his budget requests. In addition to the President, closing the loophole has been proposed by Republican tax writers and prominent members of the investment management community. With support increasing by the day, we believe that the current budget negotiation is the perfect opportunity to make this long overdue change to our tax code.
Sincerely,
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