How the Carried Interest Break Survived the Tax Bill

Updated on
  • Treasury chief sought to keep break for private equity funds
  • Congress imposed three-year holding requirement in legislation
Bloomberg’s Sahil Kapur reports on the divide between Gary Cohn and Treasury Secretary Mnuchin over carried interest.

President Donald Trump’s plan to abolish a tax break for hedge-fund managers was kept out of the final tax overhaul legislation -- an act of defiance by congressional leaders who exploited a split among Trump’s advisers.

White House economic adviser Gary Cohn wanted to end the carried interest break, while Treasury Secretary Steven Mnuchin successfully urged keeping it with new limits, according to four people familiar with the matter. Ultimately, the administration’s split gave Republican lawmakers an opening to ignore the president’s wishes, said the people, who asked not to be named to talk about private discussions.

Trump -- who’d made abolishing the little-known tax break part of his 2016 presidential campaign -- made a last-ditch effort to kill it, but ultimately gave in. Two days before Congress took its final votes on the tax legislation, Trump called top aides on the White House tax team and said: “I want it out,” said one of the people. He demanded that Cohn and the White House legislative affairs director, Marc Short, kill the tax break, the person said.

But Mnuchin didn’t agree. Nor did Republican leaders in Congress. Trump wasn’t happy with the outcome, but he has put aside that displeasure to celebrate the overall passage of the bill -- the first major legislative victory of his adminstration. Trump signed the bill Friday.

Carried interest is the portion of an investment fund’s returns that are paid to fund managers. It’s treated as capital gains, meaning it’s currently eligible for a tax rate of 23.8 percent on sales of assets held for at least a year. The top individual tax rate is 39.6 percent now, and it’ll be 37 percent as of Jan. 1.

Mnuchin’s support proved helpful for lobbyists seeking to preserve the preferential rate, who had readied for battle after Trump slammed hedge fund managers as “paper pushers” who are “getting away with murder” via carried interest during the 2016 campaign.

Three-Year Limit

In the end, congressional tax writers limited the carried interest break to gains on assets held for at least three years. The change would affect compensation for private equity managers on some deals, but not all; as of last month, about 24.3 percent of private equity deals in the U.S. since 2000 would have lost preferential tax status under the bill’s provisions, according to Pitchbook Data Inc., a Seattle-based researcher.

Extending the holding period to three years will raise only about $1.1 billion over 10 years, according to an analysis by the Joint Committee on Taxation, Congress’s official tax scorekeeper. Overall, the JCT estimates that the carried interest tax advantage costs about $16 billion over a decade.

The disagreement between Cohn and Mnuchin -- both of them alumni of Goldman Sachs Group Inc. -- wasn’t a pitched battle, said the people, who asked not to be named to talk about private discussions. It was merely a disagreement that went Mnuchin’s way.

‘Mnuchin Compromise’

Mnuchin said Sunday the administration “absolutely” defeated lobbyists with the tax bill. But one lobbyist said he was helpful to the carried interest cause, calling the final language the “Mnuchin compromise.” The lobbyist described it as a reasonable middle ground, but noted that some investment-fund managers aren’t happy about it.

Cohn said this week that the White House ran into opposition from Congress in trying to include a more aggressive repeal. “We’ve been trying to cut carried interest -- we probably tried 25 times,” Cohn said Wednesday at a Washington event hosted by Axios. “We hit opposition in that big white building with the dome at the other end of Pennsylvania Avenue every time we tried.”

There was little support for ending the tax break among Republicans on the congressional tax-writing committees, said the lobbyist. The only member on either the House Ways and Means Committee or the Senate Finance Committee who sought to end carried interest entirely was Representative Tom Rice of South Carolina, the lobbyist said.

Rice’s tax counsel, Robert Cusmano, confirmed that the congressman sought to end the loophole during the tax debate.

Legislative ‘Balance’

Other Republicans, including House Ways and Means Chairman Kevin Brady of Texas and panel members Peter Roskam of Illinois, Carlos Curbelo of Florida and George Holding of North Carolina backed keeping favorable treatment for carried interest, the lobbyist said.

“This policy was a balance between lawmakers who want it eliminated, those who strongly support it, and those who want to encourage more long-term investment in our communities,” said Emily Schillinger, a GOP Ways and Means spokeswoman.

Curbelo “believes the new legislation strikes a healthy balance between promoting entrepreneurship and ending the exploitation of this provision,” said his spokeswoman, Joanna Rodriguez. Holding’s spokesman, William Glenn, said only that the congressman “supported the compromise that continued carried interest.” A spokeswoman for Roskam declined to comment on his position on the issue, saying only that he’s comfortable with where the bill ended up.

In the Senate, Pat Toomey, a Pennsylvania Republican, was an “all-star” for their goal, the lobbyist said. Toomey’s office referred to recent interviews in which he has defended the current treatment.

“I do think that appreciated assets should be treated differently, and that’s at the heart of the principle on carried interest,” Toomey said Dec. 12 on CNBC. “But I get I’m an outlier on this.”

Trump’s Campaign

Trump made the issue a feature of his 2016 campaign with his comment about hedge funds and murder, but he didn’t just leave it there. During his second debate against Democrat Hillary Clinton, he criticized her for failing to abolish it during her years in the U.S. Senate.

By late summer, Mnuchin, a former private equity manager, was saying publicly that Trump intended to preserve the break for some firms.

“We will close the loophole for hedge funds in carried interest,” Mnuchin said at an event in Louisville, Kentucky. “What we are focused on is there are many other types of funds that do create jobs and we want to make sure we don’t discourage investment.

House Minority Leader Nancy Pelosi slammed Republicans for preserving carried interest and said they were drinking “champagne with their donors and the wealthiest” to celebrate.

“In the campaign, the president said that he would end the carried interest loophole,” she told reporters Wednesday. “Instead, maybe he didn’t communicate this to the Republicans in Congress, or maybe they used him as their front man, but they didn’t do that. Instead they did not end the carried interest loophole. They protected and even added more loopholes for the richest.”

Some Republicans say there were divisions within their party over the issue.

“Oh, I wanted it gone,” said Representative Chris Collins, a New York Republican. “A very large number of my fellow Republicans wanted it gone. But as it went through Ways and Means, it was not a make-or-break issue. In fact, some people weren’t sure till it was all done whether it was in or out.”

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