In an interview before the Super Bowl, President Obama took a jab at hedge funds and private equity firms across the country, saying that he would finally take on “carried interest” tax, Reuters reports.There were whispers about the Obama administration tackling carried interest after the election, but it wasn’t until last night that we heard anything specific from the President. Wall Street loves the rule because it allows hedge funds and private equity firms to pay tax on a substantial chunk of their income at a discounted rate — 20%.
The Tax Policy centre gets more specific:
Carried interest is a right that entitles the general partner (GP) of a private investment fund to a share of the fund’s profits (see figure 1). Typically, the GP contributes 1 to 5 per cent of the fund’s initial capital and commits to managing the fund’s assets. In exchange, the GP receives an annual management fee of 2 per cent of the fund’s assets plus a “carried interest” of 20 per cent of the fund’s profits that exceed a certain “hurdle” rate of return. The individual partners of the GP, not the GP itself, are taxed on these payments.
Last night, Obama said that he wasn’t looking to raise tax rates, but we the country does need more revenue and carried interest is an easy target since so few people deal with it.
There is no doubt we need additional revenue, coupled with smart spending reductions in order to bring down our deficit. And we can do it in a gradual way so that it doesn’t have a huge impact,” he said.
Obama indicated he would seek to end deductions that are not available to all Americans, singling out “carried interest,” which refers to the tax rate paid by many private equity managers, venture capital and real estate partnerships.
And despite the fact that hedge fund managers (like David Tepper and Bill Ackman) have said that they could deal with a higher rate, despite the fact that private equity CEO’s like Carlyle Group’s David Rubenstein have been saying that this issue was going to come up for months, there has already been some push back from industry lobbies.
“Given the 58 per cent increase in taxes paid on capital gains as part of the recent deal to avert the fiscal cliff, it is our hope that any tax reform effort in 2013 will be about crafting policies that incentivise economic growth,” said Steve Judge, president and chief executive of Private Equity Growth Capital Council, responding to Obama’s comments.
Ronald Reagan raised capital gains rates to 28% back in 1986, so expect to hear a lot of references to that during this fight.
Another thing proponents of reform have on their side is that there’s already a bill called the Carried Interest Fairness Act sponsored by Congressman Sander Levin (D-MI) but it’s been stuck in the Ways and Means Committee since last February.