Hedge fund partners and private equity billionaires pay lower tax rates than teachers and nurses. The Carried Interest Fairness Act would stop them “getting away with murder” and make them pay their fair share.

 

The carried interest loophole is a piece of the tax code that allows a few thousand private equity and hedge fund managers – some of the richest people on Earth – to cut their tax bill in half, so much so that they pay a lower tax rate than their secretaries and janitors. Codified into law by the 2017 Tax Cuts and Jobs Act, the carried interest loophole allows private equity and hedge fund managers to mischaracterize the income they make from managing their funds as “partnership” income. This means that instead of paying the 39.6% ordinary income tax rate that schoolteachers, nurses, janitors, and people who work for a living, these managers get away with paying a special 20% rate.

To make matters worse, private equity and hedge fund interests spend millions of the money they save through the loophole on lobbying to keep it wide open. The carried interest loophole is, in a perfect package, the worst example of our jointly rigged economy and political system. It has allowed the super wealthy to put more and more money in their pockets – while the rest of America pays the price.

The Carried Interest Fairness Act sends a strong message: no more freeloading. The richest among us have benefitted the most from this country, and it is far past time they contribute their fair share. The legislation eliminates this egregious loophole and makes hedge fund managers and private equity partners pay their fair share. At the same time, it helps reduce the amount of power that billionaire donors have over our political process, and ends incentives for exploitative business practices.

The Carried Interest Fairness Act – at a glance

Bill number(s): H.R. 1735 / S. 781

Sponsors: Rep. Bill Pascrell / Sen. Tammy Baldwin

Status: Introduced in the House and the Senate

House Bill Text | Senate Bill Text

What it does:

Taxes private equity and hedge fund managers at the same rate as everyone else

The carried interest fairness act would specifically reclassify this mischaracterized “partnership” or bonus income — how the bulk of a fund manager’s income is earned — as ordinary income. This would raise the rate they pay from 20% to 36.9% – exactly what regular working people pay on their income.

Raises billions of dollars in revenue

According to experts, closing the carried interest loophole would bring in billions of dollars. The most credible experts estimate that closing the loophole will bring in $18 billion per year, for a total of $180 billion over ten years. 

It won’t hurt investment

Closing the carried interest loophole won’t hurt investors simply because investors don’t earn carried interest — only the fund managers do. Anyone with money invested in a private-equity fund will still pay the capital gains rate on their investment return. Closing this loophole will only affect the taxation of the fund managers’ bonuses or carried interests.

Helps rebalance the political system

The carried interest loophole is a boon to billionaires who use their money to unfairly influence our political system. Billionaires who benefit from carried interest are some of the nation’s largest political donors. These hedge fund and private equity managers pour their ill-gotten gains into super PACs and campaign committees to re-elect politicians who support economically regressive policies like loopholes and tax cuts for the wealthy — that overwhelmingly benefit themselves while hurting ordinary Americans. 

In 2018, for example, just 7 billionaires from New York city, all of whom benefit from the carried interest tax loophole, spent over $30 million on campaigns, PACs, and SuperPACs attempting to influence elections in the state. A report by Public Citizen found that top hedge fund donors in the financial industry were responsible for the vast majority of outside political spending in the last election cycle. Closing the carried interest loophole would reduce the amount of collateral wealth that billionaires have to rig the political system – and thus the economy – in their favor. 

Respond to overwhelming public opposition

Closing the carried interest loophole is popular across the political spectrum: by a ratio of 75% to 20%, Americans believe that hedge fund managers should be taxed at the same rate as ordinary people. Even President Trump has publicly stated his support for closing the loophole multiple times (famously saying that hedge fund managers were “getting away with murder” with their abuse of the carried interest loophole). Unfortunately it was all talk – Trump’s 2017 tax bill not only failed to close the carried interest loophole, it actually codified it into law.

 

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