Private Equity Throws Its Weight Around in Washington
As Republicans set out to overhaul the federal tax code in 2017, private equity began leveraging its influence. The industry was out to protect a wildly lucrative tax break that’s helped mint more billionaires than almost any other kind of business. And it succeeded: The idea of closing the loophole simply went away.
The tax break on “carried interest” allows PE managers to pay a lower rate on much of their income. They get paid in two ways: an annual management fee and a share of investment profits. While the fee is taxed as ordinary income, the profit share is treated like a capital gain, which can be taxed less. Critics say this doesn’t make sense, because the profit share is really just another fee paid by clients. The upshot is that superwealthy private equity managers could pay lower tax rates than their secretaries.
Ominously for PE managers, Donald Trump had vowed on the campaign trail to scrap the loophole. But soon, Kohlberg Kravis Roberts & Co.’s Ken Mehlman, a former head of the Republican National Committee who’s now the buyout firm’s global head of public affairs, was helping to persuade lawmakers on Capitol Hill to fight for PE’s cause. After an effort spearheaded by Mehlman, 22 House Republicans signed a letter to the Ways and Means Committee saying the tax break “bolsters long-term investment in American compani