Levin, Baldwin Introduce Bill to Close Carried Interest Loophole
Ways and Means Ranking Member Sander Levin (D-MI) and Senator Tammy Baldwin (D-WI) have introduced a bill to close a well-known tax loophole that allows investment and private equity fund managers to pay a lower rate on their taxes. The Carried Interest Fairness Act would close a loophole allowing fund managers to classify their income as long-term capital gains, which is taxed at a top rate of 20 percent, instead of wage income, which is taxed at a top rate of 39.6 percent. (Neither number includes Medicare taxes on investments and wages.)
Investment managers often have a partnership share in their investment fund, which is structured as a "passthrough" entity. When the fund does well and its assets increase, each partner's share of the gain is taxed as capital gains. Fund managers receive some of their compensation in the form of capital gains, even though they are being compensated for their work, not investing their own money.
Different versions of the provision have been included in both the President's Budget and former Rep. Dave Camp's (R-MI) Tax Reform Act of 2014. We've often included this change in lists of options that lawmakers could consider to save money or pay for legislation. For instance, we included it in our PREP Plan released last year, that would have paid for the tax extenders by increasing tax compliance and by closing loopholes used to avoid taxes.
The bill is cosponsored in the Senate by Sens. Al Franken (D-MN), Sheldon Whitehouse (D-RI), Richard Blumenthal (D-CT), Mazie Hirono (D-HI), Joe Manchin (D-WV), Jack Reed (D-RI), Bernie Sanders (I-VT), and Elizabeth Warren (D-MA). In the House, the bill is cosponsored by Reps. Chris Van Hollen (D-MD), Charlie Rangel (D-NY), Jim McDermott (D-WA), and Keith Ellison (D-MN).
Past versions of carried interest reform legislation have been estimated to raise between $3 billion and $17 billion over ten years. That money could be used for tax reform, sequester relief, new legislation, or better yet – to make some progress in reducing the growth of our national debt.
For further reading,
- The Tax Break-Down: Preferential Rates on Capital Gains, which explained the lower rates on capital gains
- The PREP Plan: Paying for Reform and Extension Policies, which suggested using carried interest as part of a package to pay for the tax extenders
- Paying for A Fix to the VA Health System, where we suggested carried interest could pay for a Veterans' Health bill