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Donald Trump pledges to finally address carried interest loophole

The commander in chief has again voiced his displeasure with the carried interest tax provision, which allows many PE investors to have their profits be taxed at the lower capital gains rate of 20%.

President Donald Trump is trying to fix the carried interest tax loophole. Again.

In an interview Sunday with Fox News, the commander in chief voiced his displeasure with the carried interest tax provision that allows a majority of private equity and hedge fund investors to have their profits be taxed at the capital gains rate of around 20%, rather than the ordinary income tax rate, which can be as much as 37%.

“I hated it,” he said when asked about the capital gains provision.

“I would like to do it,” he said of closing the loophole. “I will do it.”

As part of the Tax Cuts and Jobs Act of 2017 that dropped the corporate tax rate from 35% to 21%, Congress did put some limitations on tax breaks afforded to alternative investment managers. For instance, private equity firms and hedge funds must now hold an investment for at least three years before they qualify for the lower 20% capital gains rate. And companies now can deduct interest costs only up to 30% of EBITDA, until 2022. Under the old law there was no limit, which essentially allowed firms to heap huge amounts of debt on their investments and then benefit from what could be a significant tax write-off.

Trump campaigned to end the carried interest loophole altogether during his presidential run in 2016. But he ultimately claimed he opted to keep it as part of negotiations that lowered the corporate tax rate an additional two percentage points.

“I could have had carried interest out, but you would have paid 23% or 24%, instead of 21%,” Trump said. “I wanted the 21%. I used that as a negotiating chip, and frankly it was a very good deal.”

There have been rumblings at the state level of ending the carried interest loophole, including in New York, but no legislation has so far materialized. If a law were eventually passed, it would certainly have an effect on a private equity industry that has lobbied hard to keep the provision in place, arguing that it rewards firms for taking risks on investments.

In March, US Senator Tammy Baldwin (D-WI) and US Representative Bill Pascrell (D-NJ) reintroduced legislation to close the provision, dubbed the “Carried Interest Fairness Act.” The American Investment Council, a lobbying group that represents the private equity industry, responded strongly.

“Sen. Baldwin and Rep. Pascrell’s discriminatory tax increase has been rejected repeatedly by economists, tax experts, and bipartisan congresses,” said AIC president and CEO Drew Maloney. “This bill is a direct assault on capital gains treatment. It would unnecessarily harm entrepreneurs, business owners, endowments, pension funds, and American workers in every state and congressional district in the country.”

That’s hardly as extreme as the reaction from Blackstone co-founder and CEO and former Trump economic council member Stephen Schwarzman, who reportedly said in 2010 that former President Barack Obama’s tax plan to close the carried interest loophole was “like when Hitler invaded Poland.”

Schwarzman, who is Jewish, later apologized for the remark.

Ironically, Blackstone would no longer be affected if the carried interest loophole were abolished. In April, the firm announced it would convert its tax status from a partnership to a corporation in hopes of drawing more investors and increasing value for shareholders. The firm joins the likes of KKR, which flipped last year, as well as Ares Management. Earlier this month, Leon Black’s Apollo Global Management also announced it would follow suit, with plans to convert sometime in 3Q.

Under the new structure, all four firms will receive the new 21% corporate tax rate on investments.

Featured image vis Muni Yogeshwaran/iStock/Getty Images Plus

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