Another bill to end the carried interest tax treatment for investment fund managers was introduced Tuesday in Congress by House Democrats led by Ways and Means Oversight Subcommittee Chairman Bill Pascrell Jr. of New Jersey. Six other House Democrats are co-sponsoring the bill.
Carried interest is the portion of an investment fund's returns eligible for a capital gains tax rate of 15% or 20%, instead of the ordinary income tax rate of up to 37%. The tax exception was created in 1954 for workers in speculative industries like oil drilling but has since grown to become a loophole used primarily in the financial services industry, with private equity partners being the largest beneficiaries, Mr. Pascrell said in a statement.
"The ability of private equity and hedge fund financiers to use the loophole impacts income inequality," said Mr. Pascrell, who has introduced similar bills in previous sessions of Congress.
"This year, millions of Americans are struggling to survive and are entitled to a fairer tax system. This loophole has survived too long and we are going to push hard to see that it is finally closed," he said.
The proposed Carried Interest Fairness Act of 2021, known as H.R. 1068, would tax carried-interest income at ordinary-income rates. Investment managers who invest their own money in their funds would still be able to use it, but income from managing a firm's assets would be taxed at ordinary rates.
According to a 2018 analysis of similar legislation by the non-partisan Congressional Budget Office, closing the carried interest loophole would raise $14 billion in federal tax revenue over 10 years.
During the overhaul of the U.S. tax system in 2017, efforts to repeal it outright were blocked, but a fund's general partners were required to hold relevant investments for three years instead of one.
The changes "made sure that investors only realize long-term capital gains carried interest after investing in a company for over three years," said Drew Maloney, president and CEO of the private equity advocacy group American Investment Council, in an emailed statement. "As workers and local economies continue to struggle during this pandemic, this would be the worst time for Washington to reverse this responsible policy and punish long-term investment that creates jobs and builds businesses in communities across America."
