The tax reform proposal released by House Ways and Means Chairman Dave Camp on Wednesday was already taking fire from Wall Street before the Michigan Republican stepped up to a podium in the Capitol and released a 32-page discussion draft of his proposal.
Details of the plan had been leaked to the media the day before, and one element – a proposal to tax as regular income so-called “carried interest” payments – a form of compensation typically paid to hedge fund and private equity fund managers –has infuriated many in the financial services industry.
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“We do need to reform the law on carried interest, and we do particularly when the activity is more like wage income,” Camp said in response to a reporter’s question. But the document Camp put out goes further than eliminating the carried interest loophole.
“Today, Wall Street tycoons and executives of leading non-profit entities and institutions receive compensation packages riddled with special tax-exempt treatment – courtesy of hardworking taxpayers,” it reads.
Camp’s proposal would eliminate the ability of businesses to take tax deductions when they pay executive bonuses in stock, rather than cash, which could not be written off. It restricts the ability of highly paid executives to shelter money from taxation through deferred compensation arrangements.
The proposal would require Wall Street firms to disclose the value of derivatives and other complex financial instruments on a “market-to-market” basis for tax purposes – a move sure to trouble investment banks and complex financial institutions.
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And finally, Camp would eliminate the tax loophole that allows special depreciation rules for corporate jets.
The carried interest rule, though, is attracting the most attention.
Carried interest refers to a form of compensation paid to hedge fund and private equity fund managers. Typically, it represents a percentage of a fund’s profits over a specified “hurdle” level. For instance, a fund manager might be guaranteed 20 percent of all profits above an 8 percent annual rate of return.
Currently, carried interest payments are taxed at the capital gains rate, rather than the higher rate reserved for regular income. The justification for having a lower rate on capital gains is that it encourages investment. But critics of the carried interest loophole point out that in many cases, the people receiving carried interest compensation don’t actually have their own capital at risk.
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The hedge fund and private equity community clearly disagree, and on Wednesday, Steve Judge, President and CEO of the Private Equity Growth Capital Council, released a statement slamming Camp’s proposal.
“Last year, private equity invested over 400 billion dollars in thousands of businesses of all shapes and sizes across all 435 congressional districts. This is why it is so disappointing that Chairman Camp chose to single out private equity investment by exacting a 40 percent tax increase that will discourage new investment. Key policymakers from both parties have already made clear that the discussion around this draft proposal will be brief.
Nevertheless, Chairman Camp’s proposal penalizes long-term capital investment, which he and other members of the House Ways and Means Committee have purported to support. It is our hope that as the debate over tax reform unfolds, policymakers will utilize the opportunity to reform the tax code as a way to encourage, not undermine, capital investment in America.”
For his part, Camp seemed unconcerned by the barrage of criticism.
“I think we take a commonsense approach to where the activity is more like wage income and can be reported and taxed as income,” he said. “I think that’s an appropriate reform.”
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