The House tax bill released earlier today has something for VCs (and private equity folks, and hedge fund managers) to celebrate: it doesn’t touch the carried interest tax break that both Donald Trump and Hillary Clinton vowed to do away with on the campaign trail last year.
Carried interest is the percentage of a fund’s profit — usually a 20 percent share but sometimes up to 30 percent for top firms — that’s paid to firms’ partners. It’s currently treated as long-term capital gains, making it eligible for a tax rate as low as 23.8 percent. Ordinary income, in contrast, can be taxed as much as 39.6 percent for single individuals earning more than $415,050 or more than $466,950 for those who are married and filing jointly.
During every U.S. presidential election season, at least one candidate vows to repeal carried interest deductions, while VCs and other private market investors rail against these proclamations, in part because they believe they deserve the tax break for taking risks and holding on to assets for what often becomes many years on end.
Indeed, in summer of last year, the National Venture Capital Association, which represents venture firms’ interests, called Clinton’s plans to do away with carried interest “misguided” and of Trump’s similar promises to do away with carried interest, the organization said it would “threaten [the] entrepreneurial ecosystem,” said the NVCA.
In fairness, the NVCA might have been right about Trump’s proposal. It suggested ending carried interest at long-term capital gains rates and instead taxing it at 33 percent, which was the highest marginal tax bracket in his plan at the time. That wasn’t the confusing part, though. What didn’t make sense to academics was a related plan to create a 15 percent business tax for members of partnerships and other pass-through business entities — which would probably destroy a lot more than the entrepreneurial ecosystem. (The very real concern: that pretty much every business would restructure as a pass-through, and the country would essentially run out of tax dollars.)
Former Goldman Sachs president turned White House advisor Gary Cohn said last month on CNBC that Trump remains intent on eliminating the carried interest tax break even though it wasn’t specified in his tax framework.
“The president remains committed to ending the carried interest deduction,” he’d said. “As we continue to evolve on the framework, the president has made it clear to the tax writers and Congress. Carried interest is one of those loopholes that we talk about when we talk about getting rid of loopholes that affect wealthy Americans.”
We’ll see. For one thing, even a blanket increase of taxation on capital gains to ordinary tax rates would result in only $1 billion to $2 billion per year in additional tax revenue according to some estimates. To put that into perspective, $3.4 trillion in revenue is collected every year.
The House plan is also far from final and, as notes The New York Times, has already “ignited a legislative and lobbying fight” with business groups, special interests and Democrats expected to fight tooth and nail for their own interests as Republicans race to get the legislation passed and on Trump’s desk for a final sign-off by Christmas.