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US Senate Receives Bill To Stop 'Carried Interest'

by Mike Godfrey,, Washington

21 September 2015

With Republican presidential candidates Donald Trump and Jeb Bush including such measures in their campaigns, President Barack Obama and Democrat lawmakers in the US Congress have plugged their existing proposals to eliminate the "carried interest" tax break.

In exchange for providing the service of managing their investors' assets, private equity and hedge fund partners often take a portion of a fund's profits, or a carried interest, which is then classified as investment income, rather than wages.

The Democrats' draft legislation, the Carried Interest Fairness Act (CIFA) of 2015, provides that carried interest compensation would be taxed at individual income tax rates of up to 39.6 percent and subject to employment taxes, rather than be taxed at the lower 15-20 percent capital gains tax (CGT) rate. However, the CGT rate will continue to apply to the extent that a manager's allocation of capital gains income represents a return on capital they have actually invested in the partnership.

The bill's main sponsors, House of Representatives Ways and Means Committee Ranking Member Sander Levin (D – Michigan) and Senator Tammy Baldwin (D– Wisconsin), issued statements after the US Joint Committee on Taxation (JCT) estimated on September 16 that the CIFA would raise USD15.6bn in additional tax revenue over a 10-year period.

"This score further highlights just how much inequality exists in our nation's tax code," said Levin. "Thankfully, closing the carried interest loophole has gathered more bipartisan support in recent months, joining our push – through this legislation – so all Americans can be treated fairly under the law."

"We need to work together – Democrats and Republicans – to eliminate this loophole that rewards the wealthy with tax preferences and make sure those at the top are paying their fair share so we can invest in an economy that works for everyone," Baldwin added.

In his remarks to the Business Roundtable on September 16, President Obama also called on Congress to act on the carried interest tax break, after noting that "you've got two leading candidates on the Republican side who have said that we should eliminate [it]."

TAGS: capital gains tax (CGT) | tax | investment | private equity | interest | law | legislation | tax rates | United States | individual income tax | Tax

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