Sep 13, 2017

Carried interest tax loophole could survive for most

AP Photo/John Locher

The White House doesn't want to close the carried interest tax loophole for private equity. Or for venture capital. Or for real estate partnerships. Or for oil and gas. Or timber. So rest easy, all of you fund managers who get nonsensical tax breaks on your fees for service. (Disclaimer: Unless you're a hedge fund manager who can't figure out how to recharacterize yourself as a private equity fund or pass-through entity).

To be clear, I'm not reflecting actual tax policy put forth by the Administration, since there still isn't any. Instead, I'm listening to Treasury Secretary Steve Mnuchin.

In April we noted how Mnuchin, when asked by Fox News' Tucker Carlson about carried interest, responded with explicit mention of how the loophole would be closed for "hedge fund managers." I kind of thought that he might be using shorthand there for a general TV audience, but he repeated the phrasing yesterday for a more sophisticated financial audience. Here is the exchange with Andrew Ross Sorkin, from the CNBC Institutional Investor Delivering Alpha conference:

Sorkin: One of the other issues, which matters a bit in most part to this audience has been the issue of carried interest and what rate that gets taxed at. The President talked for a long time about of closing that loophole. Does that get closed or changed under your tax plan?

Mnuchin: The President's been very clear that for hedge funds they will not have the benefit of carried interest. One of the things that we are working on is, as it relates to other entities that do create jobs, whether it's in different sectors, we want to make sure that we encourage jobs. So that's something we're still working on.

Sorkin: This is where it gets complicated, because partnership accounting is difficult. And then you get into oil and gas, you get into real estate, private equity. How do you separate them out?

Mnuchin: Well, the good news is we have over a hundred people at the Treasury working on this. We have a lot of people at the House and the Senate. I know this issue is incredibly important to everybody in this room. It's less important to the American public and creating jobs.

Bottom line: This isn't shorthand. It's intended policy.

Thought bubble: Mnuchin's position makes little sense from either a philosophical or revenue perspective. If you believe carried interest should be taxed as ordinary income because it is a fee for service (as I do), then that should be true for both hedge funds and other types of investment partnership. If not, then keep the current system for everyone. In terms of revenue, hedge fund carry is a drop in the bucket compared to something like real estate, or even private equity. Perhaps Mnuchin doesn't think it's terribly important because he knows that White House policy will, indeed, not be terribly important to Treasury.

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