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Mnuchin hints at keeping carried interest tax break for some, eliminating for hedge funds

Treasury Secretary Steven Mnuchin

U.S. Treasury Secretary Steven Mnuchin said Monday that President Donald Trump might keep the carried interest tax break for firms that create jobs, while eliminating it for hedge fund managers.

"We will close the loophole for hedge funds in carried interest," Mr. Mnuchin said at an event in Louisville, Ky., where he appeared alongside Senate Majority Leader Mitch McConnell. "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."

The so-called carried interest loophole enables investment fund managers to pay a tax rate as low as 20% — roughly half the top rate for ordinary income — on much of their income. Mr. Trump highlighted the carried interest tax break during his populist presidential campaign, labeling some hedge fund managers as "paper pushers" who are "getting away with murder."

Mr. McConnell said Monday the carried interest tax break would be considered during tax negotiations among congressional and White House officials. He added that aside from tax incentives for charitable giving and home-mortgage interest, "there's no point doing tax reform unless we look at all these preferences."

Carried interest is the portion of a fund's profit that's paid to private equity managers, venture capitalists, hedge fund managers and certain real estate investors. Currently, tax authorities treat that income as capital gains, making it eligible for the lower rate. The top tax rate for ordinary income is 39.6%.

"On private equity, everything is on the table," said Tony Sayegh, a spokesman for the Treasury Department. "I would not say that decision has been made."

While Mr. Trump made the carried interest issue a campaign theme, many hedge funds don't benefit from it. That's because the lower capital gains rate applies only when assets are held for at least a year, and many hedge funds hold assets for far shorter time frames — especially those that use computer-driven strategies to buy and sell securities thousands of times a day.

Under congressional budget rules that Senate leaders plan to use to bypass the chamber's 60-vote threshold, any tax cuts would have to be offset with new revenue for the cuts to be permanent. Taxing carried interest as ordinary income would raise $15 billion over a decade, before accounting for any macroeconomic effects, according to the Tax Foundation, a Washington-based policy group.

Senate Minority Leader Chuck Schumer released a statement Monday that set two conditions for the GOP to gain any Democrats' support for any tax legislation. "We believe strongly that not one penny go to the top 1% and that any tax reform must be deficit neutral," Mr. Schumer, a New York Democrat, said, in the emailed statement. "When Republicans figure out what they want to do, we'd be happy to work with them if they can agree on these broadly supported principles."

Mr. McConnell signaled during Monday's event that while the Republican-led Congress is likely to end up with a revenue-neutral tax overhaul, there has been "some internal debate" about doing temporary cuts instead of permanent changes.

In response, Mr. Mnuchin repeated a line he's said before: "Permanent is a lot better than temporary and temporary is a lot better than nothing."