The Trump administration has opened the door to huge potential savings for hedge fund and private equity managers by proposing to slash tax rates for small businesses in a way that could be exploited by Wall Street financiers.
Hedge fund and private equity managers are a subgroup that could emerge with some of the biggest gains from the President Donald Trump’s tax plan, which was scorned by Democrats last week for offering generous benefits to the rich.
Although the Trump team vowed to scrap a lucrative “carried interest” tax break enjoyed by hedge fund and private equity personnel, it raised hopes of a more significant cut to the rate they pay on some income from over 39 per cent to 15 per cent.
“It’s just a huge benefit. I don’t think we expected this to happen,” said Robert Willens, a New York tax accountant who advises hedge fund clients.
The potential windfall stems from an attempt to help small company owners. They currently pay business tax as individuals — with a top rate of 39.6 per cent — and the Trump team wants to cut their rate to 15 per cent, the same level as its proposal for bigger corporations.
Most hedge fund and private managers are classed for taxes the same way as mom-and-pop stores, rural manufacturers and other small businesses: they are “pass through” entities where profits flow through the business to be taxed only via the owners’ personal returns.
As a result the Wall Street money managers would enjoy the new ultra-low rate — unless policymakers took targeted steps to shut them out. Steven Mnuchin, Treasury secretary, has signalled a desire to prevent the provision being abused. But tax experts saying crafting exclusions is notoriously difficult.
Steve Rosenthal at the Tax Policy Center, a think-tank, said: “If somehow Trump wants to allow the 15 per cent rate for the corner grocer, but deny 15 per cent to the hedge fund manager, the private equity manager and the law firm partner, how would you distinguish those businesses in any meaningful way?”
Mr Willens said hedge funds should not be worried. “Hedge fund managers operate legitimately through pass-through entities.”
The industry has taken heat for years over the carried interest break, which lets hedge fund, venture capital and private equity managers pay a 23.8 per cent capital gains tax rate on remuneration they receive as a cut of long-term investment gains.
Critics say it is an unconscionable loophole, arguing that the managers’ remuneration is essentially the same as a salary and should be taxed at the top personal tax rate of 39.6 per cent.
White House Chief of Staff Reince Priebus reiterated on Sunday that Mr Trump wanted to get rid of carried interest.
But Leo Hindery, who campaigns against tax breaks for the financial elite as part of the Patriotic Millionaires group, said the Trump administration’s 15 per cent plan was designed as a “back door” to help anyone hurt if the carried interest break were eliminated.
“They intend to have a win one way or the other,” said Mr Hindery, founder of InterMedia Partners, a private equity group.
The powerful small-business lobby in Washington, which has long called for parity in the tax rates paid by small businesses and big corporations, applauded the White House’s 15 per cent plan.
Juanita Duggan, who is in regular contact with the Trump administration as head of the National Federation of Independent Business, acknowledged others’ worries about potential abuse by hedge fund managers and other high-income individuals.
“This is where Steven Mnuchin fully understands that you’ve got to have the guard rails. We completely agree,” she told the Financial Times. “We think there are many ways you could avoid that.”
The Trump administration’s tax proposals were short on specifics as it is still negotiating with lawmakers to find a plan that could win enough Republican support to pass the Senate and House of Representatives.
Joe Bianco, who advises hedge funds and private equity groups for the accounting firm EY, said it was too early to jump to conclusions because there were few clues on how policymakers would define which forms of income were taxed at 15 per cent.
“That has all our clients saying: I can’t really plan much about this because there are no details.”
Additional reporting by David J Lynch in Washington
