Carried Interest Will Not Go Away

December 26, 2017 James Heinsman In the News

Director of the National Economic Council Gary Cohn | 7/25/17 (Official White House Photo by Evan Walker)

Despite the best efforts of the White House and outspoken economists, the notorious tax loophole for the rich known as Carried Interest is still part of the tax code. The administration’s chief economic advisor, Gary Cohn, explained that the White House tried tirelessly to erase this hedge-fund loophole in the tax reform bill. Getting rid of carried interest is the one thing Cohn would change to the new tax plan, if he could.

“We would have cut carried interest,” he said at an Axios event. “We probably tried 25 times.”

Cohn laid the blame for this failure at the feet of Congress.

“We hit opposition in that big white building with the dome at the other end of Pennsylvania Avenue every time we tried … It is just the reality of the political system.”

The advisor said the lobbyists for hedge funds and private equity are just too powerful for lawmen to resist.

“The reality of this town is that constituency [hedge funds and private equity] has a very large presence in the House and the Senate. They have really strong relationships on both sides of the aisle,” he said. “We just didn’t have the support on carried interest.”

The loophole that remains in the Republican tax plan enriches hedge fund and private equity fund managers. Carried interest is the fund manager’s share of the fund’s profits, which is taxed at the lower capital gains tax rate of only 24 percent instead of at the usual, higher rate of almost 40 percent. According to the Congressional Budget Office the loophole costs taxpayers over $17 billion over ten years.

Some superstar investors are against carried interest, too.

Stanley Druckenmiller, the iconic hedge fund manager worth billions of dollars, said on CNBC that he is angered over the unfairness of the carried interest tax advantage.

“First of all, the billionaires lobbying the congressmen for this ought to be ashamed of themselves because we’re asking doctors and lawyers and other Americans in blue states to take tax increases so we can fund this kind of nonsense,” he said. “You have these multi, multibillionaires — with carve-outs — let’s be clear. Carried interest … you’re making money on somebody else’s capital. It’s not on your own. If that’s not income, I don’t know what is.”

Legendary investor Warren Buffet agrees. The following is a quote from an op-ed piece he wrote in the New York Times in 2011:

“While the poor and middle-class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as carried interest,” he wrote. “These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species.”

carried interest, Gary Cohn, Stanley Druckenmiller, tax loopholes, Warren Buffet,

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