Not Eliminated But Fixed – The Carried Interest Loophole

Steve Sherman
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Posted: Nov 14, 2017 9:36 AM
Not Eliminated But Fixed – The Carried Interest Loophole

While on the campaign trail Donald Trump often spoke of the abuse of the “Carried Interest” loophole. He mostly was concerned about the abuse of it by the most powerful among us. Former White House strategist Steve Bannon had been forcefully promoting the entire elimination of the loophole.

It looks like a compromise has been reached and that can be called a victory in itself. Rather than eliminate the Carried Interest provision, it has been “Fixed” per se’ to require investors to hold those investments for 3 years before utilizing the benefits of the carried interest yielding lower capital gains rates.

Eliminating the provision altogether had promised to stop the interest tax break which lowered taxes paid by venture capitalists, private-equity managers, hedge fund managers, and large real estate investors. Keeping alive in its current state would have been a major failure for the Trump administration. However, the 3-year compromise will accomplish what Trump campaigned on…eliminating the abuse.

Repealing the tax break entirely and taxing the carried interest as ordinary income had promised to add $15 billion to America’s coffers. It is unknown currently just how much the 3-year compromise will add to the bottom line, but it will be significantly less than the $15 billion repeal would have added.

Even Steve Bannon has been won over: “I have long called for the elimination of the carried interest loophole but I believe that the proposal in the House tax bill requiring investments be held for a minimum of 3 years to qualify for capital gains is a good way of eliminating short-term financial engineering that benefits no one, while encouraging long-term investments that create good paying jobs,” he said in a statement to Bloomberg.

The change forces fund managers to focus more on long-term investments rather than the quick buck. While it’s easy for people to demonize “Hedge Fund Wall Street” type investors, it should be noted that incentivizing investment is a sure way to growth. The “Fix” is likely to spur long term economic activity even more than a full out repeal.

Jobs and growth are benchmarks that President Trump will be judged by. Anything he can do to incentivize businesses to boom will simply add to his legacy.

The compromise still needs the support of influential Sens. John Thune and Orrin Hatch (Finance Chair) as well as, Rep. Kevin Brady (House Ways and Means) to see it come to fruition, but overall this is looking like it will come together. It’s good to see Congress actually reaching a compromise and getting something done. In recent days this Congress has been at risk for being labeled a “do nothing” Congress. Not everyone gets what they want with a compromise, but when even a guy like Steve Bannon who had ardently called for complete carried interest repeal being reasonable, the possibilities are endless.

The original tax bill contained the old carried interest provision unchanged. Through the political arguments of many, the acceptance of the 3-year Fix is a win for President Trump and at the end of the day, a win for the American people.