Politicians from both sides of the aisle have talked for years about wanting to raise taxes on the income generated by hedge fund and private equity managers commonly referred to as carried interest, which is taxed at the capital gains tax rate. Despite what Wall Street had feared, it turns out unified Democratic control of the federal government will not translate into a tax hike on hedge funds and private equity firms. That’s because removal of a tax increase on carried interest from the Inflation Reduction Act (IRA) was the cost of getting Senator Kyrsten Sinema’s (D-Ariz.) vote for the bill.
“We did not raise taxes. We’ve closed loopholes. … I made sure there were no tax increases in this whatsoever,” Sen. Joe Manchin (D-W.V.) said of the IRA, which is a verifiably false statement. Not only does the IRA include hundreds of billions of dollars in federal tax hikes, the nonpartisan Joint Committee on Taxation reported that the IRA will result in a higher federal tax burden for households of all income levels, even for those making less than $10,000 annually.
The IRA stands in contrast to The Tax Cuts and Jobs Act (TCJA), the tax reform bill passed by a GOP-led Congress and signed into law by then-President Donald Trump in 2017. The TCJA resulted in a net tax cut of $1.65 trillion over a decade. The TCJA facilitated broad tax relief for all income levels, in part, by offsetting it with tax increases that generally fall on high earners.
Among the TJCA tax hikes was the new $10,000 cap on the state and local tax deduction, limiting a tax break disproportionately utilized by high income filers. That wasn’t the only tax increase on the wealthy included in the TCJA.
The TCJA also increased the tax burden on carried interest by requiring investments to be held for at least three years, up from one, in order to be taxed as long-term capital gains. The TCJA’s carried interest holding period change raised taxes on private equity managers to help pay for broad income tax relief.
President Biden and other Democrats portray the TCJA as a “give-away to the rich.” Yet such attacks are contradicted by actual IRS data, which show a greater share of the TCJA’s relief went to low- and middle-income households. The TCJA made the federal tax code more progressive. Despite that, the effort to mislead Americans about the TCJA has been effective.
“A recent Gallup survey revealed that 43% of Americans were unsure whether tax reform affected their federal tax bill, even though a majority of those Americans had their taxes lowered,” Senator Chuck Grassley (R-Iowa) wrote in 2019. “Worse, 21% believe that their taxes increased, even though fewer than 6% were projected.”
The carried interest tax hike included in the initial version of the IRA was replaced with a different tax increase more than five times larger than the abandoned carried interest tax hike. The bigger tax increase that replaced the carried interest tax hike is a 1% excise tax on the value of corporate stock buybacks, which will harm state and local pension funds, union retirement plans, and the nest eggs of the 58% of American households who own stock.
“When Congress slaps additional toll taxes on defined contribution retirement plans, defined benefit plans, mutual funds, IRAs, 529s, etc. they make middle class investing more difficult,” said Ryan Ellis, president of the Center for a Free Economy and an IRS-enrolled agent. “The 1% stock buyback tax will result in less capital for shareholders—which means lower dividends and lower stock prices. It hurts anyone counting on the stock market to help pay for their retirement or their kids’ college tuition.”
National Public Radio’s Planet Money recently broadcast an episode focused on taxation of carried interest, during which the hosts claimed federal lawmakers have never raised taxes on carried interest. That’s not true and it demonstrates how many people, even those in the media, are simply unaware that private equity and hedge fund managers have been hit with a tax hike in recent years. It is news to many Americans that not only have taxes been raised on carried interest recently, but that it was imposed by conservative Republicans, not the progressive Democrats who are now declining to end the “loophole” when they have the chance to do so.
Patrick Gleason, a Haywood County resident, is vice president of state affairs at Americans for Tax Reform and a senior fellow at the Beacon Center of Tennessee
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