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Democratic lawmakers move to close 'horrible loophole' in tax code

Democratic lawmakers are going after the so-called carried interest tax “loophole” again.

Sen. Tammy Baldwin (D-WI) and Rep. Bill Pascrell (D-NJ) reintroduced the Carried Interest Fairness Act on Wednesday.

The bill will end what Baldwin calls a “horrible” tax break that benefits private equity and hedge fund managers. Democrats, including Baldwin, have proposed bills to eliminate this tax break previously.

The current tax law treats carried interest (the share of profits that general partners of private equity and hedge funds receive as compensation) as capital gains rather than ordinary income.

Critics have slammed the rule for allowing fund managers to take advantage of a 23.8% tax rate rather than a rate of up to 37%.

‘Private-equity investors can pay a lower tax rate than their secretaries‘

Baldwin and Pascrell’s legislation would tax carried interest at ordinary income tax rates.

“Certain wealthy taxpayers should not have their own parallel tax code of special breaks and deductions. Our system has always been based on the principle that we ask more from those who have more, but today private-equity investors can pay a lower tax rate than their secretaries,” said Pascrell in a statement.

Sen. Tammy Baldwin, D-Wis., walks out of Sen. Susan Collins' office on Capitol Hill in Washington, Monday, Sept. 17, 2018. (AP Photo/Pablo Martinez Monsivais)

Others compare investment managers to entrepreneurs and say carried interest is a way to pay them for their “sweat equity.”

The American Investment Council defends the lower tax rate, saying it promotes economic growth.

“Sen. Baldwin and Rep. Pascrell’s discriminatory tax increase has been rejected repeatedly by economists, tax experts, and bipartisan congresses. This bill is a direct assault on capital gains treatment. It would unnecessarily harm entrepreneurs, business owners, endowments, pension funds, and American workers in every state and congressional district in the country,” said American Investment Council CEO Drew Maloney in a statement.

Baldwin doesn’t buy it.

“I believe they have sort of configured their earnings and configured it in a way that allows them to be eligible for a lower tax rate and...not everyone can do that. Because of their industry they can,” said Baldwin in an interview with Yahoo Finance. “It is their compensation and it should be taxed as other people’s compensation is.”

‘It is a loophole that the president ran on closing‘

On the campaign trail, President Trump said he would change way carried interest was taxed, but the Republican tax law did not repeal the carried interest provision.

“It is a loophole that the president ran on closing,” Baldwin said. “He promised he would close it in his tax measure and that promise has been broken. I am still committed to working to close that loophole so that our tax code can be fairer and can also reward hard work.”

Ultimately, the GOP’s Tax Cuts and Jobs Act required fund managers to hold assets for three years, up from one year, to qualify for the tax treatment.

The Congressional Budget Office estimates taxing carried interest as ordinary income could generate $14 billion in a decade. Another critic has said the change could bring in $180 billion over 10 years.

Baldwin told Yahoo Finance she’s hopeful Congress will consider the plan as a standalone bill or as an amendment to another piece of legislation.

Jessica Smith is a reporter for Yahoo Finance based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.

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