A group of Senate Democrats on Wednesday introduced legislation to end the carried-interest tax break that benefits investment managers after President Biden also called for scrapping the tax preference as part of his human infrastructure plan.
The tax break for carried interest allows investment managers to pay taxes on certain compensation income at capital gains rates, rather than ordinary income rates. The senators’ bill would require carried interest to be taxed at ordinary income rates. The current top ordinary income rate is 37 percent, while the current top capital gains rate is 20 percent.
Democratic Sens. Tammy Baldwin (Wis.), Sherrod Brown (Ohio) and Joe Manchin (W.Va.) took the lead on offering the bill, which has more than a dozen Democratic senators sponsoring it. Brown is a prominent progressive while Manchin is a prominent centrist, indicating widespread support in the Democratic caucus for ending the carried-interest preference.
“Currently, there is a loophole in our tax code that allows investment managers to pay less taxes for wage income than the ordinary West Virginian and American worker. This legislation would close this loophole to ensure wealthy hedge fund managers are paying the fair amount in taxes,” Manchin said in a statement. “I urge my colleagues on both sides of the aisle to support this commonsense legislation that treats all workers fairly.”
The introduction of the bill comes after Biden proposed in his American Families Plan to do away with the carried-interest preference. Biden also proposed raising both the top ordinary income tax rate and the top capital gains rate to 39.6 percent for high-income taxpayers. Biden is proposing to use the revenue raised from these tax increases to pay for spending in areas such as child care and education.
Former President Trump had also called for ending the carried-interest tax break when he ran for president in 2016, but his 2017 tax law did not do away with the preference. The 2017 law did increase the amount of time investments had to be held for to qualify for the tax break, from one year to three years.
“Trump broke his promise to close this loophole and actually signed a Republican tax bill that kept it in place,” Baldwin said in a statement. “President Biden has called on Congress to close the carried interest tax loophole and this legislation will do it. Now let’s get it done and use this revenue to invest in workers and economic growth.”
Democratic senators have also introduced versions of the carried-interest bill in previous Congresses. A version of the bill was introduced in February in the House by Reps. Bill Pascrell (D-N.J.), Andy Levin (D-Mich.) and Katie Porter (D-Calif.). A number of liberal groups and labor unions support the measure, including the AFL-CIO, the Patriotic Millionaires and the Working Families Party.
The American Investment Council (AIC), a group representing the private equity industry, has expressed opposition to the bill, arguing that it would hurt the economy.
“As workers and local economies continue to struggle during this pandemic, Washington should not punish long term investment that creates jobs, builds businesses in communities, and develops more renewable energy across America,” AIC President and CEO Drew Maloney said in a statement,
Updated at 11:35 a.m.