US eyes $16bn in carry tax revenue

The White House’s 2014 budget proposal once again calls for carried interest to be taxed as ordinary income rather than capital gains.

For the sixth year in a row President Barack Obama’s budget proposal calls for a change to the tax treatment of carried interest from capital gains to ordinary income.

If implemented, the White House estimates it will raise an additional $16 billion in revenue over a 10-year time period. Last year’s budget proposal estimated carry tax reform would raise $13 billion over the same time period.

Tax increases on wealthy earners approved earlier this year by Congress may explain the increased revenue projection. Following heated negotiations over the nation’s deficit spending, Congress raised ordinary income taxes on households earning $450,000 per year and individuals earning $400,000 per year from 35 percent to 39.6 percent (40.5 percent including the healthcare tax increase under the Affordable Care Act). For those same earners, the capital gains tax rate was effectively increased to 23.8 percent from 15 percent.

Barack
Obama

The  White House has estimated significantly higher revenues from a carry tax hike under similar tax rates in past budget proposals. The President's 2010 budget blueprint, released in early 2009, estimated $24 billion in revenue over 10 years by redefining carried interest as ordinary income, subject to a top rate of 39.6 percent. 

The Office of Management and Budget was not able to respond to a request for comment by press time to answer questions about the government’s methodology in calculating its carry tax estimates.

The budget proposes an additional tax hike on super wealthy GPs. The President's fiscal plan calls for adoption of the Buffett rule, named after billionaire investor Warren Buffett, which would apply a minimum tax rate of 30 percent on individuals making more than $1 million in annual income.

Obama’s budget now meets a divided Congress, with Republicans controlling the House of Representatives and Democrats controlling the Senate. To date, Obama’s proposal to change the tax treatment of carried interest has stalled in the House, however his budget in the past has served as a starting pointing for negotiations on deficits, taxes and spending in certain areas.

Various bills to change the tax designation on carry to ordinary income have been put forward repeatedly over the past six years, but none have garnered enough support to become law. 

In a response statement the National Venture Capital Association described the carry proposal in the President’s budget as “largely symbolic and will not be enacted into law”. The trade organisation said it was “disappointed” the budget made no distinction between the asset classes that employ carry, hinting that efforts to raise carry taxes stems from desired reforms on less politically popular buyout firms. In the past the NVCA has sought to distance its members from private equity firms.