Private equity heard loud and clear when President Donald Trump told lawmakers to kill its favorite tax break — and the industry is not letting go without a fight.
An all out — and very expensive — lobbying effort is under way to shore up support among Republican allies more beholden to the president than traditional pro-business policy. As one finance lobbyist, granted anonymity to offer candid observations, said, “There is a willingness to take on some of the sacred cows.”
Presidents Barack Obama, Trump and Joe Biden have all unsuccessfully tried to close the so-called “carried interest loophole,” which taxes profits from certain investments at a significantly lower rate than ordinary income. Congressional Republicans have never sounded very eager to increase taxes on investments, and some influential lawmakers have already come to its defense. Others are keeping their cards close to their chest, including Rep. Jason Smith, chair of the House Ways and Means Committee. When asked if Smith has a position on carried interest, a spokesperson responded, “Nope.”
But as Trump pursues options to help pay for mass deportation efforts and extensions to the 2017 tax cuts, as well as his proposals like ending tax on tips, the lobbyist believes the effort “has legs this time.”
The American Investment Council recently launched a seven-figure campaign about how private equity is “investing in America,” and warning that raising taxes could curb that investment, costing communities and the federal government valuable tax revenue in the long run.
The carried interest tax break primarily benefits the private equity industry, which the American Investment Council represents, including venture capital. Real estate groups have also waded into the fight.
“Reading the tea leaves based on how the trade groups are behaving and how creative they’re getting with their argument, that is some sort of initial indication that there might be some real cross-party momentum that they feel they need to get ahead,” Emily DiVito, a senior adviser for economic policy at Groundwork Collaborative, a progressive economic think tank, told NOTUS.
The money these groups are spending is “just a fraction of how much they’ll benefit from it,” said the lobbyist, who does not represent the industry.
Eliminating carried interest would almost double the tax rate on one of two forms of compensation for fund managers. Closing the carried interest loophole could bring in about $14 billion in tax revenue over 10 years, according to an analysis by the Congressional Budget Office.
In addition to a flat management fee, usually around 2%, fund managers share profits from pooled investments known as carried interest. Under the current system, profits on investments held for more than three years are taxed at the long-term capital gains rate of 20% as opposed to the regular income tax rate, which can be as high as 37%.
That’s “a meaningful incentive to fund managers, and without that incentive, the question is going to be are as many funds going to be raised if that incentive’s not there,” Les Alexander, a professor at the University of Virginia Darden School of Business, told NOTUS.
Alexander spoke Tuesday during a Capitol Hill briefing hosted by the National Venture Capital Association. The next morning, Bobby Franklin, the association’s president and CEO, was making the case for carried interest on stage at a Punchbowl News event — the latest in the outlet’s “Investing in America” series sponsored by the American Investment Council.
“Let’s think about tax policy from the standpoint of the taxpayer,” Franklin said. “For that eight years when you’re building that company, they got net new job creation. They got new innovations. They helped the U.S. remain competitive with the rest of the world. They drove GDP. All of that had to happen before there was a carried interest to begin with.”
“So it’s only after the taxpayer got all of the benefits, the country got all of the benefits, there’s this question about, what should the tax rate be over that success story. And then it’s completely in line with capital gains tax policy,” Franklin said.
A new American Investment Council-commissioned report released this week by Charles Swenson, a professor at the University of Southern California’s Marshall School of Business, argues increasing taxes on carried interest would reduce incentives for private equity, venture capital and real estate to invest in longer-term projects, causing the federal government to lose out on as much as $70 billion in revenue over 10 years.
“The more you tax something, the less there is of it,” said Drew Maloney, the American Investment Council’s president and CEO, during the Punchbowl News event.
DiVito called the argument a “fear tactic.”
“I reject — and a lot of economists reject — the premise that somehow the activities of private equity and hedge funds should be treated at a preferential rate, that they do anything particularly special that needs to be incentivized through the tax code,” DiVito said.
“They are providing capital infusion, but it is entirely to extract any kind of financial or real estate asset from that company,” DiVito later added. “To suggest that they are number one providing some kind of essential service that deserves to be incentivized, I think is, is incorrect.”
To put it simply: Private equity has a bad reputation. Its business model is buying companies, revamping them — often by cutting jobs and taking on debt — and selling them for a profit.
One frequently cited study of almost 500 companies found those acquired by private equity were 10 times as likely to go bankrupt than those that were not. And a record number of US companies backed by private equity and venture capital filed for bankruptcy in 2024: 110, according to S&P Global, which also found more companies not backed by private equity and venture capital filed for bankruptcy last year than any year since 2011.
While DiVito is skeptical the current push to eliminate carried interest will succeed, she said that “a much more worrisome economic forecast for workers and actually small businesses and families might change some of the political headwinds.”
The Republican Party has changed significantly since Congress passed the 2017 Tax Cuts and Jobs Act. Republicans are under tremendous pressure to craft and pass a new bill that folds in campaign promises including eliminating taxes on tips and Social Security checks, all while cutting costs to appease budget hawks.
That said, several influential Republicans have already said they do not support closing the carried interest loophole. Rep. August Pfluger, chair of the Republican Study Committee, argued during the event that “you have to be incentivized in some way through the tax code” to pursue capital-intensive activities like oil drilling.
“We are only energy dominant because of provisions like carried interest in the Permian Basin,” Pfluger said.
Rep. French Hill, who chairs the House Financial Services Committee, told Punchbowl News during an series event last Thursday that he does not support closing the carried interest loophole.
“It’s been heavily politicized, but in my view, it’s a long-term investment management tool and it’s good for the country actually in terms of jobs, corporate development, business development, long-term investment incentives,” Hill said.
Hill also said closing the loophole is “not a money raiser.”
The securities and investment sector has become an important source of cash for political candidates and committees on both sides of the aisle. Industry PACs alone contributed more than $15.8 million during the 2024 election cycle, according to campaign finance data analyzed by OpenSecrets, a nonpartisan nonprofit that tracks the flow of money in politics.
Hill, who took over as head of the committee this year, was the top recipient of PAC contributions during the last election cycle, according to OpenSecrets data. But most of the money from the sector has actually gone to Democrats, many of whom supported efforts in 2022 to close the carried interest loophole.
While most Democrats including Sens. Elizabeth Warren and Ron Wyden — ranking members of the Senate banking and finance committees, respectively — have supported closing the carried interest loophole, it was a Democrat, then-Sen. Kysten Simena, who derailed the efforts in the eleventh hour of the 2022 Inflation Reduction Act negotiations after private equity industry lobbyists reportedly bombarded her office with calls.
Sinema, who since switched to being independent and retired from public service at the end of the last Congress to join the legal and lobbying firm Hogan Lovells, did not respond to interview requests from NOTUS.
“Whenever people bring up a topic like this again, people are going to become concerned again about it,” Alexander said. “I think the reason that it’s gotten a little bit higher level of concern now is because you have the president and both sides of Congress, of the House and the Senate, and both parties, both sides of the aisle, kind of looking to push something forward in this regard.”
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Taylor Giorno is a reporter at NOTUS.