Democrats have pledged to close a tax loophole benefiting private equity billionaires — but amid millions in Wall Street donations, the party has failed to do so for years.
Helen Santoro
As part of their new 2024 party platform, Democrats have promised to close a notorious tax loophole that has long allowed Wall Street billionaires to pay a far lower tax rate than most Americans. Likewise, Vice President Kamala Harris has reportedly signaled she supports ending this tax break, which could net billions in government revenue.
But Democrats have been promising and failing to close the so-called “carried interest” loophole for more than a decade, even though any president, including President Joe Biden, could do so immediately via executive action.
Meanwhile, an ever-increasing flood of financial-sector money is flowing into party coffers. Will it be enough to preserve Wall Street’s favorite tax loophole through another potential Democratic administration?
Political contributions “are absolutely a factor in the reason that lawmakers haven’t closed this loophole,” said Joe Hughes, senior policy analyst at the Institute on Taxation and Economic Policy, a liberal think tank. “People should be taxed the same whether they are working a 60-hour shift or sitting on the couch monitoring their investments on their laptop.”
The Democratic platform, unveiled ahead of the party’s National Convention this week, vows to eliminate this tax break, which allows investors to shield their earnings from higher taxes.
“Democrats will close the “carried interest” loophole, which wealthy fund managers have long used to halve tax rates on their own personal pay, so they pay a lower rate than some teachers or firefighters do,” notes the platform.
And late last week, the nonprofit think tank the Committee for a Responsible Federal Budget told Semafor that the Harris campaign was backing Biden’s fiscal year 2025 budget proposal, which includes eliminating the Wall Street tax break.
“The campaign specifically told us that they support all of the tax increases on the high earners and corporations that are in the Biden budget,” said the think tank’s senior vice president, Marc Goldwein.
But at the same time, Harris is being showered in cash from business interests that would prefer to preserve the loophole.
So far, the financial sector has spent $256 million on Democratic races this election season, considerably more than it had shelled out to the party at this point four years ago. Harris has received $80 million from the finance, insurance, and real estate sectors this year, while former President Donald Trump has brought in $134 million from these industries.
The Lingering Loophole
The carried-interest loophole allows private equity, venture capital, and hedge fund managers to categorize their share of investment earnings as capital gains, which is taxed at only 20 percent. In comparison, regular income is taxed at 37 percent.
Consequently, Wall Street billionaires are paying far less in taxes than typical employees. In fact, since 2000, the world’s largest private equity firms have avoided paying income taxes on more than $1 trillion in carried-interest pay, according to a study from Oxford University.
Since George H.W. Bush was in office, each president has “repeatedly asked Congress to close ‘loopholes’ in the tax laws,” New York University law professor Daniel Hemel wrote in a 2016 journal article. However, according to Hemel, presidents themselves could use existing statutes that give “them ample (or at least arguable) authority to enact a desired change, and even when legislative gridlock made it exceedingly unlikely that Congress would act.”
In 2013, a perfect opportunity to do so arose: A court case involving a private equity firm and a metals manufacturer authorized the federal government to sidestep Congress and close the carried-interest tax loophole. Yet President Barack Obama failed to act, even though he used his administrative power to address other issues like carbon pollution and minimum wage.
Similarly, in 2021, Biden pledged to end this tax loophole, but refused to use his executive authority to do so.
Instead, Democratic senators that year proposed legislation they claimed would close the carried-interest loophole. At the time, lawmakers said that ending the tax break would generate $63 billion in revenue over a ten-year span — although that number could be as high as $180 billion, according to calculations by Victor Fleischer, a law professor at the University of California, Irvine.
But in truth, the resulting legislation would have preserved most of the loophole — and Sen. Kyrsten Sinema (D-Ariz.) forced her colleagues to kill even these watered-down provisions after receiving nearly $1 million from Wall Street.
Even if Democrats take control of Congress this November, it seems unlikely they would pass legislation to dismantle the tax break, given the more than $70 million Wall Street has donated to Democratic lawmakers since 2020, and Senate Majority Leader Chuck Schumer’s (D-N.Y.) long-standing promise to protect the private equity industry.
Wall Street Has Questions
Tax policy will likely be a major talking point this election season, especially since many provisions from Republicans’ 2017 Tax Cut and Jobs Act — a major tax code overhaul that cut individual income and corporate tax rates — are set to expire next year.
Consequently, Wall Street is placing bets on which presidential candidate will benefit them the most: Harris or former President Donald Trump, who has previously spoken out against the carried-interest tax loophole.
According to a recent article by Business Insider, support for Trump and Harris is “pretty evenly split across an array of firms, from private equity giant Blackstone to investment bank Evercore.”
The National Venture Capital Association, a lobbying group for the venture capital community, argues that the tax break is needed to promote vital business investments that are essential for the economy.
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The carried-interest loophole is “the incentive that really drives these high risk-type investments,” said the association’s vice president of government affairs, Caroline Schellhas.
Similarly, the American Investment Council, which represents the private equity industry, supports the tax break, saying “it encourages long-term investment.” The organization’s political action committee has spent more than $780,000 in 2023 and 2024, an all-time high. The National Venture Capital Association’s political action committee has spent $131,000 on contributions to politicians over the same time period.
Other than signaling she supports Biden’s budget, Harris has not revealed many details of her tax plan — although she has proposed raising the corporate tax rate to 28 percent. It remains to be seen whether Harris will take further steps to act on her campaign promise to “ensure billionaires and big corporations pay their fair share.”
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