Democrats unveil bill to end tax break for investment managers

A group of House Democrats announced Tuesday that they are reintroducing legislation to end the carried interest tax break that is beneficial for investment managers.

The bill was rolled out by Reps. Bill Pascrell (D-N.J.), Andy Levin (D-Mich.) and Katie Porter (D-Calif.). The lawmakers say that the bill would make the tax code fairer at a time when many Americans are struggling because of the coronavirus pandemic.

“This year, millions of Americans are struggling to survive and are entitled to a fairer tax system,” Pascrell, chairman of the House Ways and Means Oversight Subcommittee, said in a news release. “This loophole has survived too long and we are going to push hard to see that it is finally closed.”

The carried interest tax break allows investment managers, such as private-equity and hedge-fund managers, to pay capital gains tax rates on compensation they receive for providing the service of managing firms’ assets. The top capital gains rate is significantly lower than the the top rate for ordinary income.

The Democrats’ bill would tax carried-interest compensation as ordinary income, rather than as capital gains, and it would treat the compensation as wage income that is subject to employment taxes.

“Wall Street bigs should not pay lower tax rates than nurses and teachers,” Levin said. “Let’s close the carried interest loophole now as we work to build a tax system where everyone can feel good about paying their fair share and working people no longer carry too much of the load.”

Ending the carried-interest tax break has been a longtime priority for many Democrats. The bill is endorsed by a number of left-leaning organizations and labor unions, including Americans for Tax Fairness and the Patriotic Millionaires.

“As demonstrated in the recent GameStop short squeeze, hedge funds and private equity managers often act as if a different set of rules apply to them than everyone else. Unfortunately, when it comes to taxes, they’re right,” said Frank Clemente, executive director of Americans for Tax Fairness. “Rep. Pascrell’s bill to close the loophole that lets these big money financiers escape paying their fair share of taxes could not come at a more opportune time.”

The American Investment Council (AIC), which represents the private-equity industry, argued that it would be bad for the economy to enact the Democrats’ bill during the pandemic.

“The 2017 tax law made sure that investors only realize long-term capital gains carried interest after investing in a company for over three years. As workers and local economies continue to struggle during this pandemic, this would be the worst time for Washington to reverse this responsible policy and punish long term investment that creates jobs and builds businesses in communities across America,” AIC President and CEO Drew Maloney said in a statement.