Art of the deal: Trump, Dems look for common ground to close tax loopholes

Venture capitalists, investors left unfazed

Both President Trump and Capitol Hill Democrats head into negotiations over tax reform vowing to put the squeeze on hedge fund managers by closing the carried interest tax loophole — a point of agreement that held out promise for becoming a foundation for a once-in-a-generation deal.

There’s one problem: Hedge fund managers don’t use the tax break for carried interest — a share of investment profits earned by money managers (usually 20 percent) that are taxed at the capital gains rate of 15 percent rather than at the top rate of 39.6 percent on ordinary income.

The tax break only applies to investments held for more than a year, and hedge fund managers make most of their money in quick trades. To reduce their tax bills, they are more likely to park their huge earnings — the top 25 hedge fund managers combined made $10.9 billion last year, according to Forbes — in offshore tax havens such as Bermuda.

It explains why the hedge fund industry shrugs off persistent attacks on their profession from politicians, usually on the left, and calls for an end to the tax code’s special treatment of carried interest.

But those that benefit from the tax break — private equity, venture capitalists, real estate investors — are just as confident it will survive Mr. Trump’s reforms.

“There’s no interest in changing the long-term capital gains treatment,” said James Maloney, vice president of public affairs at the American Investment Council. “It is only for the short-term capital gains treatment and re-characterizing that as ordinary income. But the rate would not change because it is already equivalent to the ordinary income rate.”