A surprising proposal has emerged that takes aim at the tax breaks enjoyed by hedge funds and private equity firms. The potential move is likely to spark intense lobbying efforts from these industries, which have long benefited from the carried interest deduction. This deduction allows investment managers to pay a lower capital gains tax rate on their compensation income, a significant advantage considering that capital gains are often taxed at 23.8%, while regular wage income can face double that rate.
Notable private equity firms such as Apollo Global Management (APO), KKR (KKR), and Blackstone (BX) saw their stock prices drop in response to the proposal. Although a similar idea has been previously floated by President Trump, it has yet to materialize into policy. The President had campaigned on repealing the carried interest deduction in 2016, but the issue was downplayed once he took office, and the deduction was not included in the 2017 Tax Cuts and Jobs Act.
In addition to targeting the carried interest deduction, the proposal also aims to end a tax break that allows sports team owners to pay lower income tax rates on their assets. Moreover, it seeks to make adjustments to the state and local tax (SALT) deduction, which has been closely monitored.
While the idea of eliminating the carried interest deduction has garnered support among some Democrats, it may face opposition from within President Trump’s own party. Senate Majority Leader John Thune, for instance, has previously played a key role in preventing efforts to close this tax loophole. The political landscape surrounding this issue has been dynamic, with past attempts to address the provision facing challenges from both sides of the aisle.
Recently, a new bill introduced by Democratic Senator Tammy Baldwin and Representatives Marie Gluesenkamp Perez and Don Beyer has reignited discussions on the carried interest deduction. Baldwin expressed optimism about Trump’s apparent interest in the topic and called for action to be taken promptly.
The push to reform these tax breaks is likely to be met with resistance from various stakeholders, underscoring the complex and contentious nature of tax policy in the United States. As the debate unfolds, it will be crucial to monitor how these proposed changes could impact the financial landscape and shape future investment decisions.
