The top Republican tax writer in Congress will lean on the financial industry with his planned revamp of the U.S. code, changing the treatment of carried interest and imposing a levy on the assets of banks and insurers.
Representative Dave Camp, chairman of the House Ways and Means Committee, is to unveil the proposed tax code changes tomorrow that also include revisions affecting corporate jets. He offered a preview tonight using rhetoric that in part echoes President Barack Obama’s own calls to change tax laws.
“We can clean up provisions like ‘carried interest’ that allow certain private-equity firms to get the investment-income tax rate on what anyone else would call normal wage income,” Camp wrote in an opinion article posted tonight on The Wall Street Journal’s website.
The carried-interest proposal comes on top of a Camp plan to impose a tax on the assets of the largest U.S. banks and insurers. Even though his plan faces long odds in Congress this year, the proposal will become a benchmark for tax policy.
Under current law, carried interest, or the profits share received by private equity managers, gets treated as capital gains, with a top basic rate of 20 percent as opposed to the ordinary income rate of 39.6 percent.
Obama and other Democrats have been trying since 2007 to change that law with little success. Camp is wrapping a change to carried interest inside a reconstruction of the tax code that would lower tax rates and broaden the tax base.
Steve Judge, president and chief executive officer of the Private Equity Growth Capital Council, an industry trade group, said Camp’s proposal was “disappointing.”
“Key policy makers from both parties have already made clear that the discussion around this draft proposal will be brief,” Judge said in a statement tonight. “Nevertheless, Chairman Camp’s proposal penalizes long-term capital investment, which he and other members of the House Ways and Means Committee have purported to support.”
Camp also previewed several other elements of the plan. Corporate jets wouldn’t get faster write-offs, also mirroring Obama’s proposal. Some owners of small businesses such as law firms wouldn’t be able to escape payroll taxes on some of their income. And taxpayers who contribute more than $8,750 to retirement accounts would be pushed into Roth-style plans, which generate up-front revenue for the government.
Camp also wrote that he would increase the standard deduction and the child tax credit.
The biggest U.S. banks and insurance companies would have to pay a quarterly 3.5 basis-point tax on assets exceeding $500 billion.
The bank tax proposal would raise taxes for about 10 companies -- the largest banks along with non-bank institutions such as General Electric Co.’s financing arm -- deemed systemically important. A House Republican aide with knowledge of the plan described it on condition of anonymity.
The tax, which would raise $86.4 billion for the U.S. government over the next decade, would likely affect JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, all of which had more than $500 billion in assets as of Dec. 31, according to the Federal Reserve.
The bank tax, which isn’t likely to become law this year, is part of a comprehensive plan to be released by Camp to lower corporate and individual rates and broaden the tax base.
Including a bank tax in the plan is a notable step by the Republican tax-committee chairman, because it echoes a proposal by Obama’s administration that Republicans and some Democrats have blocked since 2010.
“It’s very meaningful that it’s Camp, a senior Republican, doing this,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC in Washington. “It’s a tonal shift that we haven’t seen. To me, it underscores Camp’s motivations at this point, to leave his mark on tax reform no matter the viability of actually advancing a proposal.”
Banks, which had been preparing for the possibility that the tax would be included in Camp’s plan, have opposed what Obama has called the “financial crisis responsibility fee.” Banks maintain that it would counter Camp’s goal of setting up a tax code that is neutral across industries.
“We’re still adamantly opposed to any bank tax, because like any taxes in the past, with the large budget deficit and federal debt, these taxes will only increase in size and scope and capture more of the industry,” said Paul Merski, executive director of congressional relations and chief economist at the Independent Community Bankers of America. “It’s a very dangerous precedent.”
Unlike Obama’s plan, which would apply to banks with more than $50 billion in assets, Camp’s proposal is targeted at the very largest banks and insurers.
The plan would take effect Jan. 1, 2015, and the levy would be assessed each quarter, applying the 0.035 percent rate to each company’s total consolidated assets after subtracting the $500 billion exemption.
In addition to banks, systemically important financial institutions would have to pay the tax. The government has already designated GE’s finance arm, American International Group Inc. and Prudential Financial Inc. as such institutions. MetLife Inc. is in the final stage of the designation process.
Jamie Dimon, chief executive officer of JPMorgan, was asked at a presentation to investors today about the tax and whether it supports arguments that the bank needs to become smaller.
“If we start to do the things you want, to split up, and then the world doesn’t change, someone is going to be sitting here looking awful stupid five years from now,” Dimon said. “If the new world turns out to be that we should do something different, we’ll be doing it from a position of strength.”
Jon Diat, a spokesman for AIG, declined to comment. So did Mark Costiglio, a spokesman for Citigroup, Wells Fargo’s Ancel Martinez and Bank of America’s Jerry Dubrowski.
MetLife had $885.3 billion in total assets as of Dec. 31, according to a document on the company’s website. Prudential has $663.4 billion in assets, according to a document on its website.
Randy Clerihue, a spokesman for MetLife, declined to comment on the proposal, as did Bob DeFillippo, a Prudential spokesman.
The basic arithmetic suggests that JPMorgan, which had $2.4 trillion in assets at the end of 2013, would pay $2.7 billion a year, or about 15 percent of 2013 net income. The tax would be deductible against the corporate income tax, reducing the net cost to the companies.
Unlike in Obama’s proposal, the banks wouldn’t be eligible for a discounted rate or an exemption applied to safer items, such as insured deposits or long-term liabilities, the aide said. The definition of total consolidated assets comes from the 2010 Dodd-Frank law.
Though Camp’s version affects fewer companies, it would raise $27 billion more over a decade than the president’s plan would.
“It’s hard to find fans of too big to fail banks in this town, so it’s a pretty easy hit,” Boltansky said. “You can say it’s to the benefit of the community and regional banks.”
The fate of Camp’s broader tax proposal won’t become clear until after he releases the full plan. Many Republicans worry about the political costs of proposing limits on popular tax breaks, and Democrats object to his decision to revise the tax code without raising additional revenue for the government.
If Camp prevails, the bank tax would become a permanent feature of the code with the $500 billion threshold indexed to the growth in the gross domestic product. Obama’s proposals had been structured to end when the Troubled Asset Relief Program was repaid.
The proposal could serve as a counterweight to the industry-by-industry effects of the rest of Camp’s plan.
Unlike manufacturers that can accelerate write-offs of capital equipment or technology companies that conduct tax-advantaged research, banks are eligible for few breaks and typically have higher effective tax rates.
That means a rate-lowering, base-broadening tax plan like the one Camp is proposing could provide a significant net tax cut to banks.
“It could still be a positive for them, just less than it’s going to be for the rest of the industry and less than it would have been otherwise,” said Brian Gardner, senior vice president for Keefe, Bruyette & Woods in Washington.
The full picture of winners and losers won’t be clear until after Camp releases his full plan.
The proposal will get a “serious look whether we agree or disagree with it,” Gene Sperling, director of Obama’s National Economic Council, said on Bloomberg Television.
Camp, 60, is a Michigan Republican. He has already released drafts on several pieces of the tax code, including changes to the taxation of derivatives that would require mark-to-market accounting.