New Yorkers will be heading to the polls next week to have their say on the main political parties’ nominees for President. That means a large number of private equity professionals will be casting their vote.
New York operates closed primaries – the state’s residents may only vote for their own party’s candidates – but we’re running an open primary of our own to take the industry’s pulse. Click here to vote; results will be revealed next week.
While we can’t tell you which way to vote, we can offer some guidance around one of the few concrete policy areas that has a direct effect on private equity: the taxation of carried interest.
In the US, carry is currently taxed at the capital gains rate of 20 percent (23.8 percent including the Medicare surtax). If it were to be taxed at the current highest ordinary income tax rate, or 39.6 percent, it would bring more than $15 billion in extra tax revenue between 2016 and 2025, Congress’s joint committee on taxation disclosed in September.
Carry’s tax designation has been a talking point on Capitol Hill for many years – with bills repeatedly introduced and defeated in Congress. It’s also been an easy target in past presidential elections with pundits happy to skip the nuance and stick to soundbites of the ‘Wall Street vs. Main Street’ variety.
This US election cycle has been no different. Carry tax is a political football and has been kicked/thrown in different directions by all five front-runners.
Here – in alphabetical order – is what each candidate has said they would do about taxing carried interest:
Hillary Clinton (D) has criticised private equity and hedge fund managers for paying “lower tax rates than nurses or the truckers” and has herself been criticised for accepting paid speaking engagements at private equity events run by the likes of Carlyle Group and KKR. Her tax plan calls for taxing carried interest as ordinary income, or 39.6 percent instead of the current 23.8 percent.
Ted Cruz (R) would decrease the rate on capital gains to 10 percent and supports a flat rate of 10 percent on all ordinary income, which would also lower the tax on management fees, currently taxed as ordinary income.
John Kasich (R), a former investment banker at Lehman Brothers, has said that he would lower the tax on capital gain to 15 percent from 20 percent.
Bernie Sanders (D) would, like Clinton, tax carried interest as ordinary income, mainly to pay for a proposed $5.5 billion youth job programme that he claims would create 1 million jobs for disadvantaged young Americans. He also plans to establish four new brackets for the taxation of ordinary income, with the highest being 52 percent.
Donald Trump (R)’s plan for carry tax is potentially the most confusing of our candidates. He has said he wants to tax carried interest as ordinary income, but he also wants to lower the highest tax rate on ordinary income to 25 percent from 39.6 percent. This would effectively increase carry tax by 1.2 percent, while at the same time lowering the tax on the management fee to 25 percent. It seems to be the hedge fund world he takes most issue with, though, having said the “hedge fund guys” are “getting away with murder” by paying “nothing in taxes”.
Whether any of them will try to implement these policies – let alone be successful in doing so – when push comes to shove is arguable. But armed with this clear insight into what is admittedly just one area of the debate, we urge you to express your views on who you would most like to see in the White House and who you believe would be the best candidate for the private equity industry.