Pascrell, Levin, Porter Move to Close Infamous Tax Loophole Favored by Wall Street Bankers
Carried interest has long enriched billionaires at the expense of working class Americans
Washington, DC, February 16, 2021
Today, U.S. Rep. Bill Pascrell, Jr. (D-NJ-09), the Chairman of the House Ways and Means Subcommittee on Oversight, and Reps. Andy Levin (D-MI-09) and Katie Porter (D-CA-45) unveiled the Carried Interest Fairness Act of 2021 (H.R. 1068), legislation to close one of the most egregious loopholes in the federal tax code.
“Over the last four years, our tax system has continued to become more unfair. Our two-tier tax code, with one code for working class Americans, and another full of special breaks for the people at the very top, has destroyed public confidence in our tax structure that must be restored,” said Rep. Pascrell. “Our system always been based on the principle that we ask more from those who have more. The carried interest loophole has allowed private equity tycoons to pay lower tax rates than their secretaries. 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.”
“Closing the carried interest loophole is the right thing to do, in terms of basic fairness and fiscal soundness,” said Rep. Levin. “Wall Street bigs should not pay lower tax rates than nurses and teachers. Let’s close the carried interest loophole now as we work to build a tax system where everyone can feel good about paying their fair share and working people no longer carry too much of the load.”
“The carried interest loophole is a windfall for elite private fund managers that does nothing for American families,” said Rep. Porter. “While Orange County families have been squeezed by the Trump tax law, Wall Street bankers have continued to exploit this loophole to line their pockets at taxpayers’ expense. I am proud to join my colleagues Bill Pascrell and Andy Levin to lead this bill that would end this corporate giveaway and promote tax fairness.”
“As demonstrated in the recent GameStop short squeeze, hedge funds and private equity managers often act as if a different set of rules apply to them than everyone else. Unfortunately, when it comes to taxes, they’re right. Rep. Pascrell’s bill to close the loophole that lets these big money financiers escape paying their fair share of taxes could not come at a more opportune time,” said Frank Clemente, Executive Director of Americans for Tax Fairness.
“It's outrageous that Wall Street hedge fund and private equity managers, who make millions upon millions of dollars per year, pay lower tax rates thanks to an arcane tax loophole than the nurses, call center workers and other working-class people whose essential work has put them at risk throughout this pandemic. It's past time for Wall Street to pay its fair share, and that's why CWA supports the Carried Interest Fairness Act and urges its passage,” said Dan Mauer, Director of Government Affairs for the Communications Workers of America (CWA).
“The carried interest loophole is the poster child for what is wrong with our tax code. There is no credible economic justification for maintaining this absurd, regressive loophole – millionaire fund managers clearly do not deserve preferential tax treatment on income they earn managing other people's investments – yet the influence and wealth of its beneficiaries have ensured its continued existence. The Carried Interest Fairness Act will correct this injustice, and take significant steps towards ensuring that fund managers, some of the richest people in the country, pay a fair tax rate,” said Morris Pearl, Chair of Patriotic Millionaires.
“It is unconscionable that greedy financial executives pay a lower tax rate than teachers, firefighters, nurses, and all the other essential workers putting their lives on the line during the pandemic. Closing the carried interest loophole is an important step to creating a fairer tax code, and a financial system for working people, white, Black and brown, not Wall Street executives,” Mandla Deskins, Take on Wall Street and Americans for Financial Reform.
First enshrined into law in 1954, the carried interest exception was originally designed to help certain subsets of workers in speculative industries like oil and gas drilling, but has since grown to become a loophole used primarily in the financial services industry. Today, the largest beneficiaries of carried interest are private equity partners who use the loophole to avoid paying income taxes on compensation earned from managing other people’s money. The carried interest loophole allows these Wall Street firms to pay the lower capital gains rate on their lucrative income (15 or 20%), rather than paying ordinary income rates (up to 37%) that all other Americans pay on their earnings from work.
The ability of private-equity and hedge fund financiers to use the loophole impacts income inequality, as this tiny subset of executives make up some of the wealthiest citizens in the world. Indeed, since the recession, private equity has reaped historic profits, and at least 18 private equity executives are estimated to be worth two billion dollars or more each.
The Carried Interest Fairness Act would close this loophole by taxing carried interest compensation at ordinary income tax rates and treating it as wage income subject to employment taxes. The capital gains break would still apply for those who truly put money at risk, such as private equity partners who invest their own money in their funds. But all income from managing a firm’s assets would be taxed at ordinary rates. The Congressional Budget Office has estimated that closing the loophole will return $14 billion to American taxpayers over ten years, while experts have suggested it could bring in more than ten times as much to the Treasury.
The legislation is cosponsored by Reps. Don Beyer (D-VA-08), Tom Suozzi (D-NY-03), Earl Blumenauer (D-OR-03), and Judy Chu (D-CA-27).
As Chairman of the Ways and Means Oversight Subcommittee, Pascrell has made reforming the U.S. tax system and the IRS one of his highest priorities. In October 2020, Pascrell convened a hearing on tax fairness, highlighting the growing crisis of public confidence in the IRS.