Taxing Private Equity and Hedge Fund Managers Fairly
- How do private equity and hedge fund managers pay lower tax rates than average workers?
- Where things stand on the Hill
- Information & resources
Managers of private equity and hedge funds, some of the richest people on the planet, pay lower tax rates on their compensation than ordinary working Americans. Congress is considering legislation to close these tax loopholes.
How do private equity and hedge fund managers pay lower tax rates than average workers?
Private equity and hedge fund managers have devised a way to make the bulk of their compensation look like capital gains, to take advantage of the fact that income from capital gains is taxed at a lower rate than income from work. Specifically, they arrange to take their compensation for providing investment advice and asset management services in the form of a percentage of profits ("carried interest") of the funds they manage. So, they pay federal income tax on that compensation at a maximum rate of only 15 percent, instead of the top rate of 35 percent that applies to income from work. They also avoid paying the 2.9 percent Medicare payroll tax. This means that a single woman earning a little over $40,000 per year is in a higher income tax bracket than a billionaire hedge fund manager. Closing the “carried interest” tax loophole would raise an estimated $31 billion over the next 10 years.
Fund managers can reduce their taxes even further by putting unlimited amounts of deferred compensation in offshore accounts. Closing the fund managers’ deferred compensation tax loophole would raise an estimated $24 billion over the next 10 years.
Congress should close these loopholes as a matter of tax fairness. These unfair tax breaks cost the nation billions of dollars of revenue at a time when millions of struggling families are told that the nation can't afford to help them access health care, adequate nutrition, good quality child care, and other vital services.
Where things stand on the Hill
Legislation closing the “carried interest” loophole for private equity and hedge fund managers passed the House in June 2008 as part of a bill (HR 6275) that would temporarily patch the alternative minimum tax (AMT) through 2008. Legislation closing the fund managers’ deferred compensation tax loophole passed the House in May 2009 as part of a bill extending other expiring tax credits, creating new tax credits for alternative energy, and expanding the refundable child tax credit. A similar bill (S. 3335), introduced in the Senate in July 2008, also closes the deferred compensation loophole.
House Proposal to Pay for AMT Relief by Closing Loopholes Would Make the Tax Code Fairer and Avoid Increasing the Deficit, Citizens for Tax Justice (June 20, 2008).
Cost Estimate for H.R. 6275, Congressional Budget Office (June 20, 2008).
House Tax-Writing Committee Passes Bill to Extend Business and Energy Tax Breaks, Improve Child Tax Credit, Citizens for Tax Justice (May 16, 2008).
Myths and Realities about Changing the Tax Treatment of Private Equity Fund Managers, Center on Budget and Policy Priorities (November 8, 2007)
Private Investment Managers Dodge Billions in Medicare Taxes, National Women's Law Center (September 2007).
Private Investment Managers Should Pay Their Fair Share of Taxes, National Women's Law Center (August 2007).
Congress Should Play Fair and Close Private Equity Tax Loophole, National Women's Law Center (August 6, 2007).
Wall Street Titans Should Pay Fair Share of Taxes Too, National Women's Law Center (August 2007).
Myths and Facts about Private Equity Fund Managers & and the Tax Loophole They Enjoy, Citizens for Tax Justice (July 2007).