For all the haranguing about what the fiscal cliff could do to Wall Street’s wealthy, now that the deal’s been done, it actually looks like things didn’t work out so badly for them.Think about the issues that really matter to the financial world — capital gains (especially carried interest) tax, income tax, and estate tax rates. In all these cases, the Democrats negotiated down from the Street’s worst case scenario, or in carried interest’s case, didn’t touch the current policy at all.
Take the tax on dividends. The top rate increased to 20%, not the 39.6% some Democrats wanted. This is good news for investors as well as bankers getting their bonuses paid out in stock (as they have been more and more since the financial crisis).
Not everyone will remember this, but back in 1986, Ronald Reagan himself raised the dividend tax rate to the same rate as regular income tax in his massive tax overhaul. They weren’t lowered again until George Bush Sr. took office.
Under the capital gains umbrella falls another Wall Street darling, especially for hedge funds and private equity firms — the carried interest tax rate. It’s the percentage of an investment fund’s profits that a general partner is allowed to take home after the fund has reached a certain “hurdle” rate of return (the 20 of the infamous “2 and 20” investment firm payment structure), and it was taxed at 15%.
Late last year Carlyle Group’s David Rubenstein said he wouldn’t be surprised if the rate, which some consider a “loop-hole” went up. In fact, some money managers, like David Tepper, seemed OK with getting rid of it all-together. Even Mitt Romney admitted that carried interest should be considered when he was running for President.
However, Democrats didn’t try to tinker with this item beyond the 5% capital gains dividend rate increase.
Then there’s ordinary income tax. The Bush tax cuts are over for anyone making over $400,000 (and couples making $450,000), so they’ll be paying $39.6% instead of 35%, but the Democrats lost on their initial attempt to get that rate raised for individuals making $200,000.
Lastly, there’s estate tax, an issue close to the heart of anyone passing on a small business (like, say an investment firm). The top rate went up to 40% (from 35%), increasing revenue from this policy by $19 billion, but Democrats also wanted to kill the exemption for estates under $5 million during these negations.
That could’ve happened easily too, had a 2010 measure setting the exemption at $5 million been allowed to expire on January 1. Instead the exemption was kept in place for estate and gift purposes.
So see, everything going to be OK… right?