House Democrats divided over proposal to strip rich of carried interest tax break

House Democrats are divided over a bill that would let the rich reduce their federal tax bill through so-called “carried interest.”

The Democratic proposal would end a provision called the “carried interest loophole” that allows Wall Street partners to pay the 15% capital gains tax rate on half their profits from carrying out trades. The top tax rate on long-term, taxable gains is currently 39.6 percent.

Rep. John Sarbanes, the Maryland Democrat who chairs the House Democratic caucus, and Rep. Bill Pascrell, the New Jersey Democrat who is sponsoring the legislation, say it would also shrink the number of top earners in the country. And they’ve promised that noncorporate income earned by families such as teachers and Walmart workers would also be taxed at the 25% rate.

But some of their colleagues have pushed back.

Under the current system, average investors can pay lower capital gains taxes than qualified corporate executives, who must pay the higher personal income tax rate.

Making their case, the lobbyists for Wall Street titans like Goldman Sachs and BlackRock argue that ending the carried interest provision would be a “loophole elimination” of sorts, as well as an impediment to off-the-books, so-called “speculative trading.”

“The day-to-day traders who trade stocks on margin are absolutely in opposition to a repeal,” the two sources say.

In 2016, 27,075 lawyers and financial managers paid capital gains taxes of 35 percent on their disclosed income of $67.3 billion. They also paid $22.6 billion in ordinary income taxes.

But on many of the people they worked with, including biotech companies, hedge funds and venture capital firms, taxable income for the year was less than $250,000 — creating a significant buffer between an ordinary tax bill and the lower capital gains rate.

Many of these investors and their law firms and investment banking firms are “falling through the cracks” because the carried interest provision is in place, one of the lobbyists says.

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Republicans also have a different view of carried interest. In 2010, they sued to end the income loophole, saying it allows millionaires to pay less. “The ambiguity that surrounds the relationship between carried interest and ordinary income puts huge undue pressure on those making the decisions to give [doctors] multimillion dollar bonuses,” says Rep. Tim Murphy, the Pennsylvania Republican who filed the lawsuit.

“It doesn’t affect my lifestyle and I don’t feel [like] I should be paying a lower rate than average working people,” he says.

The proposed changes are in line with a piece of legislation released by several groups that also want to end the carried interest loophole.

The Republicans who oppose the change say it is wrong to keep allowing wealthy business people to have the same tax break that middle-class workers receive.

“Where is the evidence that people who are running hedge funds and people like Steve Schwarzman pay lower income taxes than teachers,” the former lobbyist said.

Murphy says Democrats are making the provision political. It was first introduced into the Senate in 2016 but has yet to be voted on in that chamber.

“This is a charade designed to allow Democrats to talk about taxes,” Murphy says.

Related: The next tax package may just be political theater

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