Private equity firms got bad news Wednesday as a top Democratic lawmaker announced that he was adding a prominent advocate of raising private equity taxes to his staff.
Sen. Ron Wyden, the Oregonian who is the top Democrat on the Senate Finance Committee, announced the formation of a two-member tax leadership team, which he said would be tasked with leading tax reform efforts.
One of the two is newly hired University of San Diego law professor Victor Fleischer, a tax expert responsible for popularizing the idea that private equity firms benefit from a loophole, namely the lower tax rate on “carried interest,” that should be closed.
That idea has gained currency recently, not only among Democrats but also among some Republicans, including presidential nominee Donald Trump. Fleischer’s addition to Wyden’s staff is a clear sign that the senator also aims to raise taxes on carried interest.
Wyden said Fleischer and the other team member, staffer Tiffany Smith, would be responsible for efforts to “radically simplify the tax code.” He called Fleischer “a true outside thought leader in this space.”
Carried interest refers to income earned by fund managers for managing investments that is taxed not at ordinary income tax rates, but at the lower rate for capital gains.
Fleischer, in a 2006 paper, laid out how fund managers avoided paying higher taxes on their incomes and suggested that it was a loophole to be closed.
He told the Washington Examiner in the fall that taxing carried interest at normal labor income rates could raise $180 billion for the federal government over 10 years. He also said, however, that closing the “loophole” is “an important issue of fairness and justice,” because it represents an unfair carve-out for the financial industry.
Defenders of the current tax treatment of carried interest say that it is the proper way to tax the contribution of private equity partners in any investment, similar to the treatment of “sweat equity,” or the effort and time than an owner puts into his company with the expectation that he will later reap capital gains.
