Thanks to the carried interest loophole, investment fund managers are taxed at a lower rate than other workers.
By Annie Pulley, THE BADGER PROJECT
Wisconsin Sen. Tammy Baldwin joined nine other Senate Democrats urging President Donald Trump to revive his 2016 campaign promise and pressure the GOP congressional majority to close a loophole in the tax code that’s been a long-time boon to Wall Street fund managers.
Using this carried interest loophole, investment fund managers pay a significantly lower tax rate on the profits they earn from managing investment funds like private equity, venture capital and hedge funds. Instead of the normal income tax rate, which is about 37%, these managers pay the capital gains rate, which is about 24%.
The May 18 letter, which also included the signatures of Sens. Bernie Sanders, Elizabeth Warren and Amy Klobuchar, called for the end of the carried interest loophole as Republicans work to pass Trump’s massive tax bill.
The bill passed the U.S. House without any Democratic support in a 215-214 vote on May 22.
That bill did not eliminate the loophole. But before it can become law, it must go through the Senate, where Republicans enjoy a 53-seat majority.
“As middle-class families live paycheck to paycheck, wealthy Wall Street insiders continue to get tax breaks,” Baldwin wrote on her Facebook page. “It’s past time to get rid of this unfair loophole. President Trump claims to be on board, so let’s get it done!”
Hoping to reignite Trump’s opposition to the loophole, Democrats could have an ally in Republican Sen. Josh Hawley of Missouri, who has said publicly he favors ending it.
Baldwin did not respond to repeated requests for comment.
Republicans’ “One Big Beautiful Bill” expands major tax cuts from 2017, cuts funding to some programs like Planned Parenthood, while raising it on things like the military and is projected to greatly raise the national deficit, by about $3.2 trillion over 10 years, according to one study from the University of Pennsylvania.
The original argument for the carried interest loophole was that it would help encourage investment and risk-taking, said Brian Jacobsen, the chief economist for Annex Wealth Management in Brookfield, and a finance instructor at Marquette University.
In 2016, Trump called the loophole “ridiculous.” His 2017 Tax Cuts and Jobs Act didn’t end the loophole, but it did extend the time required to hold onto an investment in order to qualify for the tax break.
If thought of like a bonus, then carried interest could be taxed like normal income, Jacobsen said. But right now, it’s treated like income from an investment.
If the loophole were closed, the estimated revenue gained from taxing the profit as normal income rather than as capital gains would be modest, at about $13 billion over a 10-year period, according to the Congressional Budget Office.
To put it in perspective, the federal government has spent more than $4 trillion since Oct. 1, 2024, according to data from the U.S. Treasury Department.
“It’s kind of peanuts in terms of the amount of money that it represents,” Jacobsen said. “It’s not really gonna move the needle all that much.”
Even so, Jacobsen acknowledged that the loophole is widely perceived as unfair and largely benefits America’s top earners. It could be a point of negotiation as the GOP’s “One Big, Beautiful Bill” goes to the U.S. Senate, he said.
“It gets to the issue of fairness,” Jacobsen said, noting that the loophole is perceived as a backdoor way to avoid paying the higher income tax rate, even as carried interest represents the vast majority of fund managers’ compensation.
“Waitresses are paying a higher tax rate than these people,” said Margaret Hughes-Morgan, formerly of Lehman Brothers and now an associate professor at Marquette’s business school.
But because the risks associated with managing these funds are higher, proponents argue the tax break is needed to encourage investment.
It takes a “different breed of person” to take on the risk these managers call their 9-to-5, Hughes-Morgan said. “These people are smart” and will continue to pay lobbyists to maintain the status quo.
“If you do change the rules, it changes people’s behavior,” Jacobsen said. “If you want less real estate development, infrastructure development, less private equity activity, less hedge fund activity, you should tax it more.”
Democrats tried to end the carried interest tax loophole in 2022 when they controlled Congress, but it was rescued by Arizona Sen. Krysten Sinema, who was at the time the Democrats’ 50th senator and clinching vote. She has since been run out of the party and the Senate.
The Badger Project is a nonpartisan, citizen-supported journalism nonprofit in Wisconsin.
This article first appeared on The Badger Project and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
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