Last Wednesday, Treasury Secretary Steven Mnuchin told the Senate Finance Committee that he and officials at the Internal Revenue Service (IRS) are putting their heads together with the goal of making certain that hedge funds do not take advantage of what many see as a tax code loophole – one that permits them to pay less in taxes when it comes to carried interest profits.
“We do believe that taxpayers will not be able to get that loophole,” Mnuchin told committee members. “We will have that resolved.”
The Secretary also told those assembled that he had spoken with IRS officials earlier that morning, and had been told to look out for guidance within the next 14 days.
The term carried interest, of course, refers to a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership, specifically in alternative investments such as private equity and hedge funds. It is, in essence, a performance fee rewarding the manager for enhancing performance.
In the past, such profits have been taxed at a capital gains rate of 15 to 20 percent rather than at standard income rates that can run as much as 37 percent.
Indeed, it was during an August 22, 2015 interview that then-candidate Trump said on CBS’s Face the Nation that “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky. They are energetic. They are very smart. But a lot of them — they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous, okay?”
Trump continued, “Some of them are friends of mine. Some of them, I couldn’t care less about. It is the wrong thing. These guys are getting away with murder. I want to lower the rates for the middle class.”
Despite the campaign rhetoric, however, the new tax law signed in December left the carried interest loophole untouched for hedge funds that held onto assets for three years, something they commonly do.
“The inventiveness of (hedge funds and private equity) to reduce taxes is truly phenomenal,” Steven Rosenthal, senior fellow at Urban-Brookings Tax Policy Center, told The New York Post.
Rosenthal also told the Business Insider the carried interest was “a key litmus test of whether the bill can be called tax reform, and it failed. This legislation was a Swiss cheese.”
Secretary Mnuchin has also come in for some recent criticism by hedge fund expert Ray Dalio of Bridgewater Associates, who said that his advocacy of a weak dollar threatens the nation’s economic resurgence.
Dalio said he sees a weak dollar as “a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities” in a LinkedIn post on Thursday.
By: Kenneth H.M. Robeson