- How do private equity and hedge fund managers pay lower tax rates than average workers?
- Where things stand on the Hill
- Information & resources
Managers of private equity and hedge funds, some of the richest people on the planet, pay lower tax rates on their compensation than ordinary working Americans. President Obama’s FY 2010 budget proposed closing these tax preferences, and Congress is considering such legislation.
How do private equity and hedge fund managers pay lower tax rates than average workers?
Private equity and hedge fund managers have devised a way to make the bulk of their compensation look like capital gains, to take advantage of the fact that income from capital gains is taxed at a lower rate than income from work. Specifically, they arrange to take their compensation for providing investment advice and asset management services in the form of a percentage of profits ("carried interest") of the funds they manage. So, they pay federal income tax on that compensation at a maximum rate of only 15 percent, instead of the top rate of 35 percent that applies to income from work. Closing the “carried interest” tax loophole would raise an estimated $23.5 billion over the next 10 years.
They also avoid paying the 2.9 percent Medicare payroll tax that other Americans pay on their income from work. Low-wage workers pay more payroll taxes to support Medicare than private equity and hedge fund managers:
- A child care provider earning $20,000 pays $580.
- A small business owner earning $50,000 pays $1,450.
- A hedge fund manager earning $500,000 in carried interest pays NOTHING.
Congress should close these loopholes as a matter of tax fairness. These unfair tax breaks cost the nation billions of dollars of revenue needed to help struggling families access health care, adequate nutrition, good quality child care, and other vital services.
Where things stand on the Hill
Rep. Sander Levin (D-MI) has introduced legislation (H.R. 1935) providing that managers of investment partnerships who receive a carried interest as compensation would pay regular income tax rates rather than the lower capital gains rates. The capital gains rate would continue to apply to income that represents a reasonable return on the manager’s own capital. Rep. Levin introduced similar legislation in the 110th Congress.
Information & resources:
President’s Obama’s Proposals to Raise Revenue, Citizens for Tax Justice (May 15, 2009).
President Obama’s Budget for Fiscal Year 2010 and Tax Reform, National Women's Law Center (May 2009).
Myths and Realities about Changing the Tax Treatment of Private Equity Fund Managers, Center on Budget and Policy Priorities (November 8, 2007)
Private Investment Managers Dodge Billions in Medicare Taxes, National Women's Law Center (September 2007).
Private Investment Managers Should Pay Their Fair Share of Taxes, National Women's Law Center (August 2007).
Congress Should Play Fair and Close Private Equity Tax Loophole, National Women's Law Center (August 6, 2007).
Myths and Facts about Private Equity Fund Managers & and the Tax Loophole They Enjoy, Citizens for Tax Justice (July 2007).