One of the biggest challenges facing lawmakers in the current tax reform process is finding a way to reduce headline tax rates in a revenue neutral way. Some revenue raisers (like eliminating itemized deductions) would raise significant revenue and simplify the tax code. Other revenue raisers come at the cost of increased complexity, at least in the short term (e.g., implementing a federal VAT or a new carbon tax). Closer inspection of ideas on the table reveals that politically popular reforms are not necessarily the largest revenue raisers. For example, there seems to be bipartisan support for taxing carried interest as ordinary income (more on that here), a relatively small revenue raiser. Continue Reading
The favorable tax treatment of so-called “carried interest” that is earned by private equity managers gained a considerable amount of attention from both parties during the 2016 presidential campaign. President Trump has repeatedly called for its elimination, a goal that Treasury Secretary Mnuchin reaffirmed in remarks that he made last Friday.
This is not a new issue. In recent years, there has been a series of legislative proposals to turn off the “flow-through” character, in whole or in part, of partnership allocations of long-term capital gain in respect of carried interest and, instead, to treat all or a portion of those allocations as ordinary income. Continue Reading
Any overhaul of the taxation of business income must address the difficult question of how to deal with pass-throughs. Most businesses in the United States are organized as pass-throughs and, since 1998, pass-throughs have earned more income than C corporations in every year except 2005. (Read the study here.) This post explains the challenges of dealing with pass-throughs in tax reform, and outlines the various ideas on the table.
Current Law Rate Differential. Under current law, pass-throughs are not subject to U.S. federal income tax at the entity level. Instead the owners take their shares of the pass-through’s taxable income into account for purposes of determining their own tax liability, with the character of the various items of income, gain, loss and deduction generally being determined at the level of the pass-through and flowing through to the owners. Continue Reading