The good news for private equity managers is that the assault on carried interest by President Obama and the Democrats may be out on strikes. After three attempts this year by Congress and the administration to close what they characterize as a carried interest tax loophole that enables private equity firms to avoid paying ordinary income taxes on income from carried interest, all struck down by Republicans, they may have given up, for now. The most recent attempt, through Obama’s American Jobs Act, comes after earlier attempts made in his proposal for extending the “Bush” tax cuts and in his negotiations over raising the debt ceiling. Each time, the proposals were shot down.
The bad news is that private equity managers are now being targeted, not for the way they earn their income, but for
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how much income they earn. With the American Jobs Act all but dead on arrival, the Senate Democrats are rewriting the bill and replacing the carried interest tax issue with a proposal to simply levy a 5% tax surcharge on incomes over $1 million. The proposed tax hike could effectively double the amount of taxes paid by private equity managers pay on at least a part of their income.
The tax surcharge is being considered in the midst of a heated campaign by Obama and some Democrats to vilify millionaires and billionaires for not “paying their fair share”. Obama has relied on the public musings by Warren Buffet who has said that he pays taxes at a lower rate than his secretary. With the “Buffet Rule” as a cornerstone of his tax the rich campaign, Obama has stepped up his assault on private equity and hedge fund managers. Having hit the wall three times with his direct assaults on carried interest he is moving ahead with backdoor assaults using the Enterprise Value Tax (EVT) and, now, more direct assaults using the 5% surcharge tax. Say what you will, he is persistent.
The American Jobs Act provides the latest cover or justification for Obama’s relentless pursuit of income that can be redistributed to pay for his programs. This time, he needs to be able to pay for the $480 billion that the Jobs Act will cost to implement. Although his proposal to increase taxes on carried interest and add an EVT would only raise $18 billion, he remains ardent in his belief that taxing the rich is the key to paying for essential programs that will add jobs in the economy. Although the revised Act stands little chance of passage, private equity managers can bet that this won’t be the last they hear from Obama on the subject.
