Clinton’s Me-Too Tax Credit and Carried Interest Tax Loophole Information

Find out about the Clinton’s Me-Too Tax Credit and the Carried Interest Tax Loophole in this post

Would you like to learn about the Clinton’s Me-Too Tax Credit or the Carried Interest Tax Loophole? Also as a note, we are in no way getting political here. We just want to provide some information regarding questions we have been asked recently. We do want to make sure that no one thinks that this will replace Earned Income Tax Credit or Child Tax Credit.

Clinton’s Me-Too Tax Credit Information

Hillary Clinton on Tuesday rolled out a new tax break that, if enacted, would put more money into the pockets of working parents with very young children.

The Democratic presidential candidate said she would push for a doubling of the current $1,000 tax credit for children ages 4 and under. An estimated 15 million children would be eligible.

The new help would come in the form of a tax credit, which cuts the amount of federal taxes owed dollar for dollar. Translation: If you owe $3,000 in income taxes, but you have a new baby, your tax bill would fall to just $1,000.
Even people who earn too little to owe income taxes would get cash back from the U.S. Treasury. “It’s just like the tax refund check that everyone else gets; it’s dollars in your pocket,” said Roberton Williams, a senior fellow at nonpartisan Urban-Brookings Tax Policy Center.

“It rewards work,” because it starts to kick in with the first dollar earned on the job and keeps rising to the full $2,000 credit. “It helps very low income families,” Williams said.

Under current law, families with children 16 and under are eligible for a tax credit of $1,000 per child. The credit phases out when income exceeds $75,000 for single filers or $110,000 for married couples filing jointly.
Clinton’s proposal is very different from Republican candidate Donald Trump’s child care plan, which would provide most of its benefits as a tax deduction. In other words, such a benefit is worth more to wealthier taxpayers in higher tax brackets with youngsters in child care.

Clinton’s plan might be able to pick up some bipartisan support. For example, Florida Sen. Marco Rubio called for a child tax credit of up to $2,500 during his effort to become the Republican presidential nominee.

What would it cost and how would it be paid for?

The child-credit-expansion cost is estimated at $150 billion to $200 billion, spread over a decade. To offset that and other proposed middle-class tax breaks, Clinton would push for new taxes on Wall Street, the wealthy and corporations.

Source: NPR.

Carried Interest Tax Loophole Information

Many politicians want to close the carried interest tax loophole for private equity managers. The only problem is, no such loophole exists.

For 100 years, since federal taxation of partnerships began, the rules have been the same.

Let’s say a father and a son go into business together to buy the local lawn mowing company for $1,000. The father puts up the money and the son does all the work of having the idea, managing the partnership and so on. They agree to split the partnership’s future profit 80 percent for the father (as the passive, money limited partner) and 20 percent for the son (as the active, hands-on general partner). If years later, the partnership is sold for a profit, there would be long-term capital gain on that profit. The father would own 80 percent of the profit and pay 80 percent of the capital gains taxes. The son would own 20 percent of the profit and pay 20 percent of the capital gains taxes.

Private equity works the same way, under the same tax rules, with no special rule or loophole. Institutions like pension funds are the passive, money-only limited partners, and teams of managers (working collectively as private equity firms) are the hands-on general partners. If the original partnership ownership is split 80-20, then the taxes due on a long-term capital gain sale are also split 80-20.

Carried interest is just another way of saying the son, or the private equity partners, retain some starting ownership for their ideas and effort, as well as for their dollars. Carried interest is just another term for sweat equity or founder’s equity, a concept that is widely accepted in every type of traditional partnership, private equity or not.

Some people argue that if you do not put up dollars for your ownership, you must be working for a bonus or a salary, and that carried interest means you are just an investment banker working for a fee.

However, private equity firms are not transaction bankers; rather, we own and control entire companies over many years. My own firm, New Mountain Capital, is a growth-oriented private equity firm whose motto is “building great businesses.” We have 106 people at New Mountain headquarters, including an investment team of 64, with more than 20 from nonfinancial backgrounds as chief executives, chief operating officers, management consultants and information technology experts. We have started, or acquired and built, more than 30 companies since 2000. We bring capital and management to these companies. We choose the company’s operating team, set the strategy, lead the board and are responsible for the results.

Private equity as “business building” is very socially beneficial when done right. New Mountain publishes a social dashboard on our website every year. At the end of 2015, we had added or created over 23,000 jobs at our private equity portfolio companies while we owned them, net of any job losses. We have spent $3.1 billion on research and development, software development and capital expenditures. We have created an estimated $15 billion of shareholder gains. We have never had a private equity bankruptcy or missed an interest payment.

Private equity tax rates are also far higher than frequently understood. Federal taxes on long-term capital gains (at a 23.8 percent rate) are just one of the many taxes we pay. We also pay ordinary income-tax rates on salary and fees, city taxes, state taxes and unrelated business taxable income taxes.

I am an active private equity professional living in New York City, and my own marginal tax rate has been about 70 percent for each of the last 10 years. This is a 40-to-50 percent effective tax rate each year all in (city, state and federal), and the estate taxes I will owe on the remainder. The people and institutions who are famous for low tax rates – Warren E. Buffett, Mitt Romney, Donald J. Trump and the Clinton Foundation – are not active private equity professionals. Mr. Buffett is in insurance; Mr. Romney was long retired from private equity; Mr. Trump is in real estate; the Clinton Foundation is a 501(c)(3) tax-favored organization.

There is a lot of blind and unthinking anger in the world. Wall Street is an easy political punching bag, and carried interest is an easy issue to be a demagogue over. The fact, though, is that there is no special loophole for private equity and never has been. Private equity with strong social metrics and a 70 percent tax rate should at least be allowed to pay the same high taxes that all other traditional partnerships have paid for the last century.

Source: New York Times.

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