Private equity, hedge fund, and venture capital managers can all heave a sigh of relief. The latest House Tax Bill that has been released has absolutely no mention of any regulation to cap the tax break enjoyed on carried interest that both Donald Trump and Hillary Clinton vowed to bring to a heel during their respective campaign trails.
Carried interest is derived as a part of the funds profit (normally in percentage) and it is normally around twenty percent. Some extremely high performing funds even charge as high as thirty percent. It is generally paid out to the funds institutional investors.
At the moment, carried interest enjoys being given the tax treatment of long term capital gains thereby making it eligible to earn a rate as low as 23.8 percent. Ordinary or salaried income can get taxed in contrast with rates as high as 39.6 percent for single individuals earning more than $415,050 or more than $466,950 for those who are married and filing jointly.
History is witness to the fact that every presidential election campaign has had at least one of the candidates openly speaking against the tax breaks enjoyed on carried interest but no action has been taken till date. Venture Capital and Private Equity, on the other hand, have since always lobbied for the tax breaks on carried interest citing reasons such as cost for the risk being taken and subsequently holding on to assets for what often becomes many years on end.
The NVCA or National Venture Capital Association, a body that lobbies for the Venture Capital industry, has been openly vocal against demolishing the tax breaks enjoyed on carried interest. Just last summer, the NVCA publically trounced Hillary Clinton’s plans to get rid of the tax breaks enjoyed on carried interest as “misguided”.
In response to the Trump camp’s promises of similarly getting rid of the tax breaks, the NVCA issued a statement stating that “it would threaten the entrepreneurial ecosystem”.
In all fairness, the National Venture Capital Association could have been very possibly right about Trump’s proposal. Trump’s proposal suggested taxing carried interest at thirty three percent, which was the highest marginal tax bracket in his plan and doing away with it being treated as long term capital gains.
This part was easy to digest for the academica. What wasn’t was the notion to create a fifteen percent business tax for members of partnerships and other pass-through business entities, which would probably destroy a lot more than the entrepreneurial ecosystem. This would basically entail every business to just set up as a pass through essentially running the country dry of tax revenue.
A blanket rise in capital gains taxation rates to ordinary tax rates would just result in a billion USD or so being categorised as additional revenue as per some estimates. The additional bump in the numbers is extremely negligible considering the fact that 3.4 Trillion USD is collected in revenue on an average every year.
The House Plan is also far from a final legislation. It has already “ignited a legislative and lobbying fight” with business groups, special interests as stated by the New York Times. Democrats are sure to fight tooth and nail for their own interests while the Republicans race to get the bill on Trump’s desk by Christmas.