Trump Proposes to End Carried Interest
What Exactly is Carried Interest?
It is a component of the compensation paid to private equity and hedge fund managers. It is essentially the fund’s share of profits generated from an investment. Carried interest is generally taxed at a lower capital gains rate of 20% rather than the higher (37%) rate for ordinary income.
Trump’s Proposal
In 2017, President Trump proposed doing away with the carried interest tax break as a part of his tax reform plan. This proposal would have carried interest classified as ordinary income.
Arguments in Favor
- Fairness: Proponents contend that carried interest is compensation and should, thus, be taxed at the same rate as other forms of income.
- Revenue Enhancement: The carried interest tax benefits repeal would provide an estimated $187 billion in extra tax revenue over the next decade.
Arguments Against
- Job Loss: The private equity and hedge fund industry is claiming that the repeal would result in a loss of jobs and capital outflow.
- Investment Disincentive: Opponents state that taxing investment appreciates increases economic growth.
- Complexity: The repeal would make the tax code highly complicated; accordingly, this will put further pressure on IRS resources for implementation.
Current Status
Trump’s proposal to repeal carried interest was not included in the Tax Cuts and Jobs Act of 2017. The provision is still part of the tax code, but the future remains uncertain.
What Lies Ahead?
Repeal of the carried interest tax break might be brought back on the tax reform agenda. It could find its way into the plans of Biden reforms. In the event that the tax break is abolished, it will be somewhat crushing upon the private equity and hedge fund industry.