By Allen Sloan
The Washington Post
D.C.) -- Donald Trump
isn’t exactly shy when it comes
to denouncing things he doesn’t like. And there’s one particular part
tax code that he denounced over and over both during the campaign and
He said that
the people benefiting from this portion of the code
were “getting away with murder.”
So you’d think
that the tax bill being pushed through Congress
with Trump’s eager backing would be closing this loophole. But you’d be
As you’ll see in a bit, talking about closing the loophole isn’t the
The loophole is
called “carried interest.” That’s tax jargon for
the share of investors’ profits that goes to the managers of private
funds, venture capital funds and hedge funds. The standard rate is 20
of a fund’s profits, although there’s wide variation, both up and down.
The loophole is
that the managers’ piece of the action comes
from owning a piece of the partnership called a “profits interest”
getting a fee from the partnership.
investment has been held for more than a year before
being sold, the managers’ “profits interest” proceeds, like the gains
to the “capital investors” who put up the money, is taxed as long-term
gains rather than as ordinary income. Cap gains currently carry a top
income tax rate of 23.8 percent, whereas “earned income” such as fees
salaries carries a max tax of 40.5 percent.
(The other part
of the managers’ fee — typically two percent a
year of the investments under management — is treated as regular
including many Wall Street types whom I know, have
been offended by the carried interest loophole for years.
After all, if
you run a mutual fund and get a bonus based on
your investment performance, that bonus is treated as earned income,
capital gains. So why should things be different for managers of a
equity or venture capital or hedge fund?
hedge funds last because although they’re the most
popular target, they typically don’t hold individual investments long
qualify for capital gains treatment.)
after being criticized because their tax
legislation didn’t deal with carried interest, House and Senate
addressed the problem. Sort of, but not really.
doesn’t require proceeds from “profits interests”
to be treated as ordinary income — which would be real reform. Rather,
legislation requires that investments be held for more than three years
capital gains treatment, rather than the current period of more than
much a joke, given that venture capital and buyout
funds — whose managers are the biggest beneficiaries of the “carried
loophole — typically hold investments for well over three years before
them. This legislation has the appearance of reform, but not the
A spokesman for
Kevin Brady, chairman of the tax-writing Ways
and Means Committee, told The New York Times that the three-year
“strikes the right balance for economic growth and fairness without
investment in American entrepreneurship.” But this doesn’t address the
substance of the loophole, which is that carried interest payments are
fees masquerading as capital gains, which means they are taxed at a
rate than fees.
Let me take you
through this a bit.
people who run partnerships differently from the
people who are passive investors in partnerships has been around
when private equity, venture capital and hedge funds began pulling in
of billions of dollars of capital and paying their managers billions a
carried interest, what had been a relatively obscure tax provision
a big deal.
Lots of private
equity types claim that special tax treatment
for carried interest is vital to them. However, when you look at
can see that claim is dubious at best.
Carlyle, two of the biggest private equity firms
(which now call themselves alternative investment firms), were founded
and 1987, respectively.
through 1990, regular income and capital gains were
taxed at the same maximum rate: 28 percent. And in 1991 and 1992, the
another big firm, TPG, was formed, top rates were almost the same: 31
regular income, about 29 percent for cap gains. So unless they were
the rates to change — which is, shall we say, highly unlikely — the
preferential rate for carried interest was no big deal.
didn’t really separate much until 1993. That year, the
top regular income rate was more than 10 percentage points above the
rate (39.6 percent to 29.2 percent), and the spread kept widening. (You
find the year by
year rates here.)
Now what about
Trump? Was he fouling his own nest by criticizing
carried interest? I think not.
As best as I
can tell from Trump’s financial filings and his
leaked 2005 federal income tax return, he doesn’t play the carried
game. So even if carried interest were to be reformed properly, it
cost him anything.
The bottom line: If the
pending tax legislation becomes law,
heaven forbid, and the carried interest loophole requires a three-year
than a one-year waiting period, you can bet that Trump and the
boast about how they taught Wall Street a lesson. And it will be a pack
Sloan is an editor-at-large at ProPublica and a seven-time winner of
Award, business journalism's highest honor. This column was written for
Washington Post. Heather
Long of The Washington Post and Claire Perlman of ProPublica
contributed reporting to this column.