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Democrats Ready Carried-Interest Tax Hike After 15-Year Lobbying Campaign


The carried-interest change was included in a last-minute deal reached by Sens. Joe Manchin, above, and Chuck Schumer.
Photo: Michael Brochstein/Zuma Press

Senate Democrats are poised to raise taxes on a key source of private-equity managers’ income, capping a 15-year quest to close what many lawmakers see as an egregious gap in the tax code.

The tax increase on fund managers’ carried-interest income, which is tied to the performance of investments when they are sold, had seemed dead until late Wednesday. But then Sens.

Joe Manchin
(D., W.Va.) and

Chuck Schumer
(D., N.Y.) included it in a last-minute deal that the Senate could pass as soon as next week. If Senate Democrats can prevent any defections and keep the carried-interest change in the bill, it is likely to be the only direct tax increase on individuals included in the party’s climate and healthcare legislation.

The carried-interest tax increase, estimated to raise $14 billion over a decade, is fiscally small and symbolically large. Private-equity billionaires from companies such as
Blackstone Inc.,
& Co. and
Carlyle Group Inc.
have been rhetorical targets and political foils for Democrats, but Democrats have been unable to raise taxes on the industry directly. The House passed carried-interest changes in 2010, but the plan died in the Democratic-controlled Senate.

“Sometimes it actually is impossible to permanently defend the indefensible,” said

Jason Furman,
who has argued for changing the law as a think-tank expert, Obama campaign adviser, White House aide and economics professor over the past 15 years.

Industry lobbyists have tied the individual tax rates on investment managers to the strength of the economy. And they have warned that changes could hurt the performance of the public pension funds and charitable endowments that benefit from investing in private-equity funds. Democrats, meanwhile, have focused on how the current rules benefit a small sliver of wealthy Americans.

Trade groups representing the private-equity, hedge-fund and asset-management industries objected to the proposal on Thursday, and will now try to sway enough Democrats to get the proposal rejected.

“One of the things that aligns us with our investors is we get paid when they get paid,” said Drew Maloney, chief executive of the American Investment Council, an industry trade group. “So it really has been a model that has worked well for several decades now, and we don’t think it should be disrupted.”

Lawmakers have criticized the longstanding rules for taxing carried interest because they let private-equity and hedge-fund managers treat some of their income as long-term capital gains, which get lower tax rates than ordinary income.

Private-equity investments are typically structured so that managers get both fixed management fees and a percentage of the profits, or carried interest. The fees are taxed as ordinary income at rates up to 37%, while the carried interest can qualify for long-term capital-gains rates of up to 23.8%. The problem, critics say, is that the carried interest is really compensation for labor, not a capital gain from an initial investment.


Bill Pascrell
(D., N.J.) calls it “one of the worst loopholes” in the tax code, and has been trying to change the law for more than half of his 25 years in Congress.

“We have been pursuing its demise for years and there is no excuse to allow it to continue,” he said.

Democrats will need to muster all 50 members of their Senate caucus in favor of the change, which is part of a broader bill being advanced under fast-track budget rules.


Kyrsten Sinema
(D., Ariz.) has objected to many proposed tax increases, and she was the main reason the carried-interest change was dropped from prior iterations, according to a person familiar with the negotiations. Ms. Sinema hasn’t commented on the Manchin-Schumer proposal.

Ms. Sinema’s office declined to comment on the legislation.

“I anticipate that we will have 50 votes. I think that we are still waiting for that confirmation,” said Rep.

Richard Neal

(D., Mass.), chairman of the House Ways and Means Committee. He said Mr. Manchin had long supported more of the House’s tax increases while Ms. Sinema had backed more of the spending ideas.

Mr. Manchin told reporters Thursday that he was adamant about the carried-interest language and wasn’t prepared to lose it.

“People that have benefited from carried interest for years and years and years knew that they had a good run,” he said. “It was long overdue to get rid of and you couldn’t justify it any more.”

During his presidential campaign,
Donald Trump

talked about changing the tax rules for carried interest. The 2017 tax law he signed did so in part. Unlike most capital gains that qualify for long-term rates after one year, carried interest now does so after only three years.

The Democrats’ bill takes that same approach and adds two more years. That means many hedge-fund managers will continue to not be able to get the lower tax rates on carried interest, because their investments are typically short-term.

The bill would also generally start counting the holding period when funds substantially finish making investments, not when they raise money or start making investments. Because of how funds operate, the new rule isn’t really five years but would be equivalent to an eight-year or 10-year holding period before long-term capital-gains rates are available, Mr. Maloney said. That would put it beyond the typical length of a private-equity investment.

“The primary tool that a private-equity firm has to recruit and retain talented people is carried interest,” said Marco Masotti, global co-head of the private funds group at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. “This type of change alters balance in an industry that’s performing very efficiently.”

For publicly traded private-equity firms such as Blackstone and KKR, the change wouldn’t affect shareholders because the firms have made the shift to abandon their partnership structures and become C corporations. Individual partners at the firms would have to pay higher taxes for their gains on shorter-term investments.

“I don’t think that increasing from three- to five-year holding periods is going to change the way that we invest or the way that we deliver value,” said

Michael Arougheti,
chief executive of
Ares Management Corp.
“My personal view is that if we try to push investors to be longer-term, that’s a good thing.”

The bill builds off the solid 2017 structure and closes several gaps in that law, said

Steve Rosenthal,
senior fellow at the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute in Washington.

“10 or 20 [years] would be better if you wanted something with teeth, but directionally they’re going the right way,” he said. “Is this approach, going from three years to five years, which is pretty modest, going to affect capital formation? I don’t think so.”

The Democrats’ changes don’t go as far as a proposal last year from Senate Finance Committee Chairman

Ron Wyden
(D., Ore.) that would have raised $63 billion over a decade. And it also includes a carve-out for taxpayers with incomes below $400,000, to keep President Biden’s campaign promise.

Write to Richard Rubin at and Miriam Gottfried at

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