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 this and other tax loophole.
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. Fund managers can reduce their taxes even further by putting unlimited amounts of deferred compensation in offshore accounts.
Congress should close these tax loopholes as a matter of tax fairness, and because 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
Lawmakers in the House and Senate introduced legislation in June 2007 (H.R. 2834, S. 1624) to make private investment managers and firms pay their fair share of taxes. Both houses of Congress have held hearings on the issue. Predictably, the private equity industry is using its billions to dispatch armies of lobbyists to oppose legislation that would eliminate their special tax privileges, but hundreds of groups representing average Americans have urged Congress to resist pressure from special interests and close the loopholes.
On November 9th, the House passed a bill (H.R. 3996) on a vote of 216-193 that would end the special tax treatment of investment fund managers' carried interest income and close the loophole for offshore deferred compensation, and use the revenue to pay the cost of a temporary patch to the alternative minimum tax, expansion of eligibility for the refundable child tax credit, and extending various expiring tax provisions. The bill now heads to the Senate, where the carried interest reform faces serious opposition. President Bush has threatened to veto this important piece of legislation.
Myths and Realities about Changing the Tax Treatment of Private Equity Fund Managers, Center on Budget and Policy Priorities (November 8, 2007)
House AMT "Patch" Bill is Fiscally Responsible, Also Includes Child Tax Credit and Carried Interest Provisions That Would Make the Tax Code More Fair, Center on Budget and Policy Priorities (November 7, 2007).
Carried Interest Facts, Citizens for Tax Justice (November 7, 2007).
Private Investment Managers Dodge Billions in Medicare Taxes, National Women's Law Center (September 5, 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).