As both a presidential candidate and then as president, Donald Trump promised countless times to do away with the carried interest loophole as part of tax reform. In fact, Trump repeatedly cast this promise as central to his larger vow to “drain the swamp.”
This was widely understood as a shorthand way of saying the government is currently rigged in favor of the 1 percent, but that Trump, if elected, would use his insider knowledge of the system to fix it and make it more equitable.
“Trump lands a blow against the carried interest loophole,” the New York Times headlined – in 2015. “One thing I’d do is get rid of carried interest,” Trump said in a presidential debate in 2016. He repeated it again and again this year. “Carried interest was unfair, and it’s gone,” he said on Face the Nation this past spring.
Do you really need me to tell you which tax loophole has survived all but unscathed through tax reform?
Carried interest is a loophole where investors pay taxes on what is essentially income at the capital gains rate instead of at the typical tax rate on earnings. As business reporter Allan Sloan pointed out in the The Post, “Cap gains currently carry a top federal income tax rate of 23.8 percent, whereas ‘earned income’ such as fees and salaries carries a max tax of 40.5 percent.”
The English translation: it’s quite possible your neighborhood multi-millionaire or billionaire is paying an effective lower tax rate than you. The greatest beneficiaries of the carried interest loophole are private equity firms, hedge funds and – wait for it – real estate concerns. People are on to this game: In 2012, a Bloomberg News poll found more two out of three respondents would like to see an end to the carried interest loophole.
But under the current Congressional tax reform legislation, carried interest reform was downsized from Trump’s campaign promises. When the House passed its plan, it didn’t do away with the break. It instead requires people to hold investments for three years before qualifying for the lower tax rate, rather than the previous one year.
The few supporters of the carried interest loophole like to claim it rewards risk and entrepreneurship. Changing the period for carried interest from one to three years “strikes the right balance for economic growth and fairness without stifling investment in American entrepreneurship,” a spokesman for GOP Rep. Kevin Brady said last month.
But this is a largely meaningless change. According to PitchBook Data, one out of four private equity sales since 2000 would have been snagged by this change. That means three out of four would still benefit. This is like draining the swamp – but employing a spoon used for feeding an infant to do so. The Senate plan didn’t even make this change at all.
And then, on Saturday, not even 24 hours after that legislation passed the Senate, Trump attended a fundraiser hosted at the Park Avenue apartment owned by Blackstone Group Chairman Steve Schwarzman. Schwarzman is so, shall we say passionate, about protecting carried interest, he claimed in 2010 that an attempt by the Obama administration to do away with it was “a war,” adding, “It’s like when Hitler invaded Poland in 1939.” (Yes, those quote marks are there for a reason. He really said that.)
Nothing says draining the swamp like breaking a campaign promise, and then allowing a major beneficiary of that action to hold a fundraising event for you less than 24 hours later.
Make no mistake, Senate Republicans had opportunities to fully do away with the carried interest loophole. They didn’t. When Democratic Senator Tammy Baldwin proposed an amendment to do away with the carried interest loophole, the Senate rejected it on a party line vote. Why? No Republicans offered any serious public explanation.
Nor has the Trump administration explained why this promise has gone unfulfilled. On Face the Nation, when host John Dickerson asked White House budget director Mick Mulvaney to account for the failure to act, he replied: “We sort of left it up to the House and the Senate.” In other words, the White House dodged.
Trump campaigned on a promise that he would drain the swamp. Instead, he’s on the verge of signing a tax reform package that will sunset the reductions the typical middle income filer will get, even as it leaves in place the very provision that he himself held up as Exhibit A of how elites wallow in the swamp to their own great benefit.