Research Desk predicts: How much revenue would closing the hedge-fund loophole bring in?
By Dylan Matthews
If the carried interest loophole was closed how much revenue would be raised?
The "carried interest loophole" refers to a quirk of the tax code that results in lower tax rates for general partners (GPs) of investment funds, such as hedge fund managers. Generally, GPs receive two forms of compensation: a management fee, which is a percentage (2 percent, usually) of the firm's total assets, and "carried interest," a percentage (usually 20 percent) of the firm's profits. The management fee is taxed like any other form of income, but carried interest is taxed as investment income, which can face a top rate as low at 15 percent.
Hedge fund managers and other fund GPs, of course, usually make quite a bit of money, so this loophole provides a substantial tax break to a group of high earners.
This raises fairness concerns, both because of its regressivity and because income earned in similar institutions, such as investment banks, is subject to normal income taxes, which encourages work in private funds as opposed to other businesses. While the number of people affected by the loophole is relatively small, those who are affected earn enough that subjecting carried interest to normal income taxes could raise a fair bit of revenue. The Joint Committee on Taxation estimated (pdf) that closing the loophole along the lines proposed by Senate Democrats would raise $7.4 billion over five years, and $17.7 billion over ten:
This fix was included in the package of tax extenders that Harry Reid originally bundled with the unemployment benefits extension, but which was filibustered until the tax provisions were all excised as a means of getting swing Republicans on board. However, my colleague Jia Lynn Yang reports that the tax extenders bill is still on the docket for this Congress, and so another vote on closing the carried interest loophole could come before the midterms.
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