When asked in Sunday’s debate about what he would do to make sure the rich pay their fair share of taxes, Donald Trump said he’d repeal what he called the carried interest loophole. The provision allows partners of private equity firms, hedge funds, and other companies to pay tax on their compensation at more favorable capital gains rates instead of ordinary income rates.
But Trump left out one detail: He’d give many of these partners an even better deal by reducing the tax rate on the income people receive from partnership interests to 15 percent, even lower than the capital gains rate under either current law or his plan. Today, the top tax rates are 39.6 percent on ordinary income and 20 percent on capital gains. High-income households pay an additional 3.8 percent surtax on earnings and capital gains, but not business income.
Trump would reduce the top rates on ordinary income to 33 percent and on capital gains and dividends to 20 percent and repeal the 3.8 percent surtax. But he would create a special rate of 15 percent for business income, including income of partners of private equity funds, hedge funds, and real estate companies. Trump has said that when partners choose to pay at the 15 percent rate, distributions from their businesses would be taxed as dividends. If so, this additional tax would raise the total tax rate on distributed income to 32 percent. But Trump has been ambiguous about important details, sending signals that the full tax break may be retained for many partners. For example, he says he’d exempt “small businesses”—which he does not define—from the second level of tax.
Bottom line: Trump would give many private equity partners an even bigger tax advantage over wage earners than they enjoy today. And they wouldn’t even have to go through the trouble of restructuring the way they take their compensation.
This article first appeared in TaxVox.