WASHINGTON, DC –In an effort to restore fairness to the tax code, U.S. Senator Jack Reed (D-RI) is seeking to close the “carried interest” tax loophole, which lets private equity firms and Wall Street managers at investment partnerships pay a lower tax rate on their income than most American workers.

Reed is teaming up with U.S. Senator Tammy Baldwin (D-WI) to introduce the Carried Interest Fairness Act (S. 445).  Their legislation would ensure that income earned by investment managers of private equity, venture capital, and hedge funds is taxed at the same rate paid by the vast majority of Americans.  The non-partisan Congressional Budget Office (CBO) estimates that ending the loophole could reduce the federal deficit by $13 billion through 2034.

Under the current system, fund managers get paid up to two percent of assets as a regular fee, plus twenty percent of the fund’s profits.  The managers pay regular income tax on the two percent, but when it comes to their share of the profits, which is called “carried interest,” they usually pay only the lower long-term capital gains tax rate.  In a sense, they are converting income from labor into capital gains.  So even though the investors are putting up the fund’s capital and taking the risk, the fund managers are able to treat their part of the fund’s earnings as a capital gain, subject only to a top capital gains tax rate at 20 percent compared to the top federal income tax rate of 37 percent for the wealthiest Americans. 

“Americans feel the system is fixed against them, and this big, fat loophole sure seems that way. This commonsense legislation would close a glaring loophole in the tax code and restore a key measure of fairness so that wealthy fund managers pay the same rate as regular working Americans.  It would end preferential treatment for Wall Street elites and prevent these wealthy executives from paying lower rates than their salaried employees.  Everyone has a right to earn their pay, but there shouldn’t be a special set of tax breaks just for the wealthy and well-connected.  Congress needs to close this loophole, simplify the tax code, and enact other sensible reforms that will strengthen our economy,” said Senator Reed, a senior member of the Senate Banking Committee.

“Wall Street investors should not be paying less in taxes than Wisconsin firefighters, teachers, and small business owners. But right now, the wealthiest Americans are gaming our tax system to get out of paying their fair share, passing their tax burden onto working Wisconsinites,” said Senator Baldwin.

Despite President Donald Trump previously pledging “we will eliminate the carried interest deduction and other special interest loopholes...”  during the 2016 election, his 2017 Tax Cuts and Jobs Act “failed to eliminate [the] key deduction used by wealthy investment firms that Trump had vowed to kill,” leading PolitiFact to rate this a “Promise Broken.”

In 2017, Senate Republicans rejected an amendment to the Trump tax bill by Senator Baldwin to close the carried interest loophole.

In 2022, Senator Reed and the majority of his Democratic colleagues pushed for a provision to eliminate the carried interest loophole as part of the Inflation Reduction Act.  But with a 50-50 split in the U.S. Senate, the measure was stripped out of the underlying bill after then-Senator Kyrsten Sinema (I-AZ) objected to its inclusion.

In addition to Baldwin and Reed, the Carried Interest Fairness Act is cosponsored by U.S. Senators Chris Van Hollen (D-MD), Patty Murray (D-WA), Brian Schatz (D-HI), Ed Markey (D-MA), Amy Klobuchar (D-MN), Tim Kaine (D-VA), Jeff Merkley (D-OR), Peter Welch (D-VT), Elizabeth Warren (D-MA), Cory Booker (D-NJ), Bernie Sanders (I-VT), and Mazie Hirono (D-HI).

Companion legislation has been introduced in the U.S. House of Representatives by Congresswoman Marie Gluesenkamp Perez (D-WA-03).

The legislation is endorsed by Communications Workers of America, Americans for Tax Fairness, the American Federation of Teachers (AFT), Public Citizen, American Federation of State, County and Municipal Employees (AFSCME), Alliance for Retired Americans, Americans for Financial Reform, Take on Wall Street, Patriotic Millionaires, 20/20 Vision, Community Catalyst, Main Street Alliance, American Federation of Government Employees, Small Business Minority, Economic Policy Institute, and the National Women’s Law Center.