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Trump’s Tough Talk on Hedge-Fund Taxes Doesn’t Match His Plan

Donald Trump said “hedge fund guys are getting away with murder” when he called for ending a lucrative tax advantage for investment managers, but his published tax plan would give them an even bigger break.

Trump, the presumptive Republican nominee for president, has called for abolishing the special tax treatment that applies to “carried interest,” the share of investment funds’ profits that are paid to fund managers. Currently, carried interest is treated as capital-gains income, which makes it eligible for a tax rate as low as 23.8 percent — much lower than the current top individual income tax rate of 39.6 percent.

But the plan published on Trump’s website would also create an entirely new tax rate — just 15 percent — for individuals who get income from business partnerships. That category includes most managers at hedge funds, private-equity funds and venture capital funds.

In other words, if Trump’s proposals came to pass, many investment managers’ tax rates would go from 23.8 percent to 15 percent.

“He’d be doing me a favor,” said Scott Fearon, the president of Crown Capital Management, a hedge fund and investment fund in Greenbrae, California. “He’d be cutting my taxes quite a bit.”

Spokesmen for Trump’s campaign didn’t respond to requests for comment in e-mails and telephone calls. On Sunday, Trump said on ABC’s “This Week” that if he’s elected, he expects his tax proposals would change during negotiations with Congress. Ultimately, tax rates for high earners might be higher than he has suggested, he said, but he’d try to preserve proposals to lower taxes on the middle class and on businesses. He didn’t mention his partnership proposal specifically.

“I will try and keep everything,” Trump said. “What I really want is lower on business, because business — we’re the highest-taxed nation in the world. And I want lower on the middle class.”

Trump’s position on hedge fund taxes resurfaced Thursday when he named Steven Mnuchin, a hedge fund manager, to lead his national fundraising. Trump, a billionaire businessman and former reality-television star, had been largely self-funding his campaign.

Mnuchin declined to comment on Trump’s attacks on carried interest and hedge funds. But he said he’s already gotten calls from fellow hedge-fund managers and others on Wall Street expressing their support for the candidate.

Rate Cut

Some analysts have pointed out previously that the plan on Trump’s website would actually benefit investment managers. The Urban-Brookings Tax Policy Center found that under Trump’s plan, “carried interest would be taxed at a much lower rate than under current law.” Alan Viard, a tax policy scholar at the conservative American Enterprise Institute, said of Trump’s proposal: “It’s clearly a tax-rate cut for private equity, hedge funds and venture capital.”

Trump’s 15 percent rate would apply to so-called “pass-through” business structures, including partnerships, limited liability companies and sole proprietorships. For tax purposes, such businesses pass their earnings through to their owners, who then pay tax at rates that reach 39.6 percent under current law.

Saying the current system “stifles small businesses,” the campaign has pitched its 15 percent rate as a boon for them. Trump also has proposed a top income tax rate of 15 percent for large corporations, which currently are subject to a top statutory rate of 35 percent. And he has called for cutting individual income-tax rates across the board as well, taking the top rate from 39.6 to 25 percent.

Debt Increase

While Trump has proposed limiting the value of certain individual tax deductions to help pay for those cuts, various analyses suggest his plan would reduce federal revenue by about $10 trillion over its first decade. While it would improve incentives for U.S. taxpayers to work, save and invest, it could increase the national debt by almost 80 percent of gross domestic product by 2036 unless it’s accompanied by large spending cuts, according to the Tax Policy Center’s analysis.

The broad language of Trump’s proposed 15 percent tax rate for pass-through partners will get investment managers’ attention, said Bill Burnham, the founder of Inductive Capital, a hedge fund and investment firm in Reno, Nevada.

“You can bet your last dollar that every hedge, private-equity and venture-capital fund under the sun would pass through as much income as they could,” Burnham said. But he also said the proposal to treat small businesses the same as giant private-equity and hedge funds “seems like a big loophole that would quickly close at some point.”

Candidates’ Calls

Bashing carried interest emerged as a popular theme in the 2016 presidential campaign. Democrats Hillary Clinton and Senator Bernie Sanders of Vermont joined Trump in calling for its end, as did former Republican contenders Senator Ted Cruz of Texas and Jeb Bush.

Hedge funds, investment pools open only to wealthy investors, engage heavily in short-term trading and tend to have shorter-term gains. That means their carried interest often doesn’t qualify for the 23.8 percent rate, which is reserved for gains on assets held for a year or more. By contrast, private-equity funds put money into longer-term investments.

Trump’s proposal to abolish the current treatment of carried interest is aimed at “speculative partnerships that do not grow businesses or create jobs and are not risking their own capital,” which may not include private-equity funds. Regardless, both types of funds would be in line for the proposed 15 percent rate under Trump’s proposal. But that doesn’t mean the candidate won’t change it.

“As far as Donald’s plan, it’s not a plan without far more details,” said entrepreneur Mark Cuban, the owner of the Dallas Mavericks basketball team and a star of ABC’s “Shark Tank” television program. “These are talking points. Nothing more.”

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