Biden goes after carry in VP debate

Thursday night’s Vice Presidential debate included a pointed reference to carried interest’s tax treatment, which Vice President Joe Biden referred to as a loophole.

Vice President Joe Biden trained his rhetorical crosshairs on carried interest during the Vice Presidential debate Thursday. 

“You think these guys are going to go out and cut those loopholes? The loophole – the biggest loophole – they take advantage of is the carried interest loophole and the capital gains loophole, they exempt that,” Biden said.  

Biden used the attack on carried interest’s tax treatment to target the lack of specifics in Republican candidate Mitt Romney’s tax plan, which was being championed by running mate Representative Paul Ryan. Although both Romney and Ryan have repeatedly said they would close “loopholes” in the US tax code to raise revenues, they have yet to specify which loopholes they would target. 

Ryan did not respond to Biden’s assertion that the Romney tax plan would exempt carried interest from their list of loopholes. 

Joe Biden

The Romney campaign has not taken a stance on carried interest’s tax treatment, directing repeated requests for comment to a statement the Bain Capital co-founder gave to Fortune in August: “What I’ve said in the past is that if something is a capital gain it should be treated as a capital gain. If something is ordinary income it should be treated as ordinary income”. 

A source with knowledge of Romney's campaign said Biden's characterisation of the tax plan was “not true”, but did not clarify further. 

Many Democrats – and some Republicans – have long considered carried interest’s treatment as capital gains a classic example of a tax loophole. Capital gains treatment traditionally applies to earnings generated by investments (or the sale of personal assets), and are taxed at 15 percent. Tax rates on traditional income can be as high as 35 percent.

Opponents of carry’s current treatment argue that capital gains should not apply to general partners’ private equity earnings, as they are not providing the bulk of the investment capital. 

The Private Equity Growth Capital Council has combatted repeated efforts to change carry’s tax treatment over the last several years, arguing that the ownership stakes private equity firms hold in their portfolio companies qualify as capital assets, thereby making proceeds from their sale capital gains. 

Concern relating to a possible change in carried interest’s tax treatment has led some firms to request terms in their limited partnership agreements that would allow them to renegotiate in the event their tax liability increases. Several LPs contacted by Private Equity International have indicated that they would not abide the inclusion of such terms.