Former Florida governor Jeb Bush has announced the outline of his tax proposal in a new Wall Street Journal op-ed published Tuesday evening. Among Bush’s proposals are three income-tax brackets (28 percent, 25 percent, and 10 percent), cutting the corporate tax rate to 20 percent, and eliminating several “convoluted, lobbyist-created loopholes” in the code.
One such loophole is the advantage for private-equity and other high-dollar financial managers known as the “carried interest” loophole. It’s common practice for hedge-fund managers to receive a percentage of an investment’s dividends as payment for managing those funds. Under the current tax regime, those dividends are taxed not at income rates but at the lower capital-gains rates. The lower rates on capital gains are meant to encourage investment, not give a tax break to those managing those investments.
In a small but important shift in Republican tax policy, Bush’s plan would eliminate this loophole. “[W]e will treat all noninvestment income the same, so unless you stake capital in an investment, you won’t be able to claim the capital-gains tax rate on your market gains,” he writes in the Journal. Instead of paying 20 percent, hedge-fund managers would be paying 28 percent, Bush’s top marginal income tax-rate.
Conservatives have often defended the carried-interest loophole; just this week, in fact, Ryan Ellis of Americans for Tax Reform wrote an op-ed for Forbes arguing that taxing carried interest as ordinary income as a “very bad idea.” The previous Republican presidential candidate, Mitt Romney, made a significant portion of his fortune from this tax-code advantage.
Politically, however, this defense has added to the perception that the GOP supports tax carve-outs for the very rich. Donald Trump, ever perceptive to the populist blind spots of Republican economic policy, has taken to railing against hedge-fund managers as people who “shift paper around” and “pay nothing.” At 20 percent, they aren’t paying “nothing,” but under Bush’s plan, they’ll pay a little more—in fact, they’ll pay at the same rate other high-income earners pay.
It’s not clear if Trump’s recent noise about the carried-interest loophole spurred Bush to include it in his plan. Bush was coy when I asked him about it last month, and his Virginia campaign co-chair Eric Cantor deflected questions about taxing carried interest at income rates. But by including the provision in his proposal, Bush has shown a willingness to break with the Republican tax-policy establishment.
