Senators Push to End Private-Equity Tax Break
Last week, two Senate members proposed an end to the prized tax break for the private-equity industry. Senate Finance Committee Chairman Ron Wyden and panel member Sheldon Whitehouse proposed a repeal to the carried interest tax break. This would prevent private equity fund managers from paying lower tax rates on their earnings compared to regular income. This bill also prohibits deferring tax payments on those earnings. According to an estimate made by the Joint Committee on taxation, requiring fund managers to pay taxes when they receive profits will raise about $63 billion over the next decade. While the American Families Plan did call for an end to carried interest, it fell short of eliminating an investor’s ability to delay paying taxes on the income. This means that the initial plan would have created about $14 billion over the next decade, according to an estimate from the congressional tax scorekeeper.
In addition to salaries, private equity managers rely on a share of the appreciation of the assets that they oversee, which can be in the millions of dollars. These gains have previously been taxed as capital gains, which is a much lower rate than the top marginal income tax rate applied to wages. Biden has proposed to raise the top income tax rate from the current 37% to 39.6%. Carried interest payments are being taxed at 20% under the current law.
The potential revenue totals are just a small portion of the up-to $3.5 trillion, but the issue represents a symbolic political win for lawmakers who say they want to raise taxes on the wealthiest Americans to make the Tax Code more equitable and lessen income disparities. Carried interest has been under attack from both parties for years. In 2017, the private equity industry successfully fought off major changes in the tax overhaul that year, when some legislators considered cutting the tax break to pay for reductions elsewhere. In the end, the GOP kept the carried-interest tax break intact but required that investors hold their investments for longer to get the benefit.
The Senate will soon begin debating a budget resolution that will serve as the framework to advance the Democrats’ economic agenda. The bill requires unanimous support from Democrats in Congress and will likely consume the legislative agenda in the fall.
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