A prominent group of US Senate Democrats, including Massachusetts Sen. Elizabeth Warren, is targeting private equity's golden goose.
Sens. Al Franken (D-Minnesota), Warren, Sheldon Whitehouse (D-Rhode Island) and Tammy Baldwin (D-Wisconsin) are calling upon the US Treasury Department and US Internal Revenue Service to crack down on management fee waivers at private-equity funds.
Management fee waivers don't matter to everyone in private equity — only the biggest money makers in the industry. General partners at private equity firms receive management fees and the waivers allow them to shift those fees into the carried-interest portion of their earnings.
Carried interest is taxed at lower rates than regular income.
"Fund managers should not be allowed to alter the character of their salary income simply by inserting into their fee arrangements a few magic words that lack meaningful economic effect," the group wrote to Treasury Secretary Jack Lew in a letter dated September 21. "Billions of dollars of tax revenue has already been permanently lost as a result of abusive fee waivers."
But the IRS is already pushing regulations that would do just that. Seeing senators — albeit from the same side of the aisle — trying to drum up momentum for a tax-code switch could mean more trouble for private equity, however.
This isn't the first time the private equity industry's salary has come under scrutiny from Washington.
Presidential candidate and former Florida governor Jeb Bush has also put private equity's tax breaks in his crosshairs while out on the campaign trail. Carried interest taxation has also been a key point for politicians stumping for the 2016 nomination, as well.
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