Cohn Says Trump Intent on Ending Carried Interest `Loophole'

Trump highlighted the carried-interest tax break during his populist presidential campaign, labeling some hedge fund managers as “paper pushers."

(Bloomberg)—President Donald Trump is still intent on eliminating the carried interest tax break even though it wasn’t specified in his tax framework, White House Economic Adviser Gary Cohn said.

“The president remains committed to ending the carried interest deduction,” Cohn said in an interview on CNBC on Thursday. “As we continue to evolve on the framework, the president has made it clear to the tax writers and Congress. Carried interest is one of those loopholes that we talk about when we talk about getting rid of loopholes that affect wealthy Americans.”

Carried interest is the portion of a fund’s profit -- usually a 20 percent share -- that’s paid to private-equity managers, venture capitalists, hedge fund managers and certain real estate investors. Currently, tax authorities treat that income as capital gains, making it eligible for a rate as low as 20 percent. The top tax rate for ordinary income is 39.6 percent.

Trump highlighted the carried-interest tax break during his populist presidential campaign, labeling some hedge fund managers as “paper pushers” who are “getting away with murder.”

The tax framework released Wednesday may contain more than $1 trillion in breaks for the highest earners and the wealthy -- at least without revenue offsets that remain largely unspecified. The plan sets up some suspense over where Congress will set the top individual income-tax rate -- giving lawmakers flexibility to set it higher than the 35 percent mentioned in the document. But another provision, which would slash the rate paid by owners of partnerships and limited-liability companies, is seen as a potential bonanza for people at the top of the income scale.

Treasury Secretary Steven Mnuchin said last month that Trump may keep the carried interest tax break for firms that create jobs, while eliminating it for hedge fund managers.

“Politics aside, carried interest meets the criteria for long-term capital gains,” said James Maloney, vice president of public affairs at the American Investment Council, the private equity industry’s lobbying group in Washington. “It is not a loophole and both Treasury and nearly every Republican member of the House and Senate understands this appropriate classification.”

Many hedge funds don’t benefit from the tax break. That’s because the lower capital gains rate applies only when assets are held for at least a year, and many hedge funds hold assets for far shorter time frames -- especially those that use computer-driven strategies to buy and sell securities thousands of times a day.

On the corporate side, Cohn said Thursday that Trump isn’t willing to negotiate a tax rate higher than 20 percent for businesses.

“We would have liked to start lower” than 15 percent “and given ourselves some negotiating room,” Cohn said. A 20 percent corporate tax rate is a “bright line test for us” and “we are not going over” that level. “This does become a reality of making the budget balanced and making the economic realities of the United States work,” he added.

The other part of Trump’s proposed tax plan that’s non-negotiable is “that we give everyday hard-working Americans a tax cut,” said Cohn.

--With assistance from David Carey.To contact the reporter on this story: Sarah McGregor in Washington at [email protected] To contact the editors responsible for this story: Brendan Murray at [email protected] Alexis Leondis, Joshua Gallu

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