Even as his campaign has shown remarkable staying power, Republican presidential candidate Donald Trump is dogged by the perception that there isn’t much to him beneath the bluster and the glitz. But he may have inadvertently steered the race into important territory, at least when it comes to Wall Street and taxes.
In interviews over the last several days, Trump made blistering comments about inhabitants of a corner of the financial industry who have grown accustomed to criticism. “I know a lot of bad people in this country that are making a hell of a lot of money and not paying taxes,” Trump said in an interview with Time, in apparent reference to hedge fund and private equity fund managers. “The tax law is totally screwed up.”
"They're paying nothing and it's ridiculous," he added on CBS a few days later. “The hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky." He went on: “They’re energetic, they’re very smart. But a lot of them, it’s like they’re paper pushers. They make a fortune, they pay no tax...The hedge funds guys are getting away with murder.”
Trump was apparently referring to carried interest. Most hedge funds and private equity funds are structured as partnerships where the fund managers serve as general partners and the investors as limited partners. Carried interest represents the fund managers’ share of the income generated by the fund, which is typically 20 percent of the fund’s profits at the end of the year. For most funds, this share of the profits, called an “incentive fee,” makes up most of the fund managers’ income, and, depending on the size and performance of the fund, it can stretch into the hundreds of millions of dollars. It’s largely what pays for 40,000 square foot mansions in Greenwich, Conn., and major league baseball teams and $100 million works of art. Under current tax rules, much of that incentive fee income is taxed at the long-term capital gains rate of 20 percent. If it was taxed as ordinary income, the top rate would be 39.6 percent. For hedge fund managers, the carried interest tax provision is something of a third rail, the one thing that unites them in furious opposition.
The idea of getting excited about taxes, especially the confusing taxes that a particular subset of the financial industry pays, it not an easy one to sell to the public, let alone to Congress, which has declined several times to take up bills designed to tinker with the carried interest tax provision. President Obama made several attempts to change the tax code, none of which made much progress. Former Republican Representative David Camp, who was the chairman of the House Ways and Means Committee, included carried interest changes in his tax plan he introduced last year, but it didn’t go anywhere.
As John Oliver once put it, “if you want to do something evil, put it inside something boring.” Discussions of carried interest are pretty boring. With Trump in the race throwing word-grenades at every turn, though, all of the candidates may be forced to confront the issue. No matter one’s views on Trump himself, this wouldn’t be a bad thing.