The American Investment Council , which advocates on behalf of the US private equity industry, has criticised Republican presidential candidate Donald Trump's plan to end favourable tax treatment of carried interest, saying it demonstrates a “lack of understanding”.
Carried interest or carry is the share of profits the general partner of a buyout fund gets to keep. It is typically set at 20 percent; the remaining 80 percent is turned over to the limited partners, who provide the capital.
In a speech at the Detroit Economic Club on Monday, Trump said that as part of his tax reform package, his administration would “eliminate the Carried Interest Deduction and other special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers”.
Currently, carry is treated as capital gains rather than as wages, and therefore attracts a lower rate of tax. Investment managers who receive carry pay a rate of 23.8 percent in federal personal income tax on these profits; that's a 20 percent tax on net capital gains and an investment tax of 3.8 percent. If carry were treated the same way as wages, however, it would be taxed at the highest possible rate of 43.4 percent, or a 39.6 percent tax on net capital gains tax and an investment tax of 3.8 percent.
Mike Sommers, president and CEO of the Washington, DC-based American Investment Council, said that Trump's speech “demonstrates a lack of understanding of what carried interest is and the critical role of private equity in the US economy”.
“Carried interest is not a deduction or a 'loophole', but rather a long-standing type of capital gains income,” Sommers said.
Private equity professionals “invest time and managerial expertise” to strengthen US businesses, Sommers said, noting that the industry supports over 11.3 million American jobs.
“Unfortunately, the political rhetoric surrounding carried interest has become a symbolic gesture, and one that Americans should realise is deeply misinformed,” he said. “Unfairly raising taxes on carried interest is bad policy and it would discourage vital long-term investments that support American businesses and create jobs across the country.”
The DC-based National Venture Capital Association , the trade association for the US venture capital industry, said that Trump's remarks on carried interest reveal an “unfortunate misunderstanding”.
“Despite the populist uproar, carried interest has been an important feature of the tax code that properly aligns the long-term interests of investors and entrepreneurs to build great companies together, and is only realised after our country receives the benefit of greater economic activity,” said Bobby Franklin, president and CEO of NVCA.
“Rather than continue to toss around the proverbial political football to raise taxes on new company creation, let's instead discuss ways we can encourage entrepreneurship and innovation by rewriting rules in the code which hurt or ignore startups.”