Hedge fund legend Bill Ackman urges Biden to close the loophole that allowed him to make billions

William Ackman is not known for his political takes. Typically, the billionaire hedge fund manager spends his time dissecting corporate finances, looking for his next leading investment Where activist play.

But this week, the CEO of Pershing Square Capital Management found himself in the middle of a heated debate over the “loophole” interest— which enables private equity and hedge fund managers to reduce their tax burden on profits from fund investments. It’s a key part of the tax code that helped make so many hedge fund managers like Ackman billionaires in the first place.

Democrats have been working to close the interest-carrying loophole in the $739 billion bill Inflation Reduction Act of 2022and many hedge fund managers came out in opposition, but not Ackman.

“The interest loophole is a blot on the tax code,” Ackman said in a thursday tweet.

While a billionaire hedge fund manager might seem like an unlikely supporter of the Dems’ fight against tax loopholes, Ackman has actually advocated closing the loophole on carried interest for a decade now.

But before jumping into billionaire beef with deferred interest, it’s best to define a few key terms.

Interest: an “escape” or an entrepreneur’s best friend?

Private equity and hedge funds make money in two main ways. First, they charge a base management fee on the total amount of money a client has invested. Second, they earn a share of the profits from their fund’s investments if they achieve a minimum return known as the hurdle rate. All profits made by the managers above the minimum rate are called interest carried.

The deferred interest provision allows fund managers to pay a capital gains tax rate (approximately 20%) on this income, instead of the much higher normal income tax rate (37% for taxable income of single filers over $539,900).

This tax treatment, orloophole, according to whoever you ask, is supposed to incentivize fund managers to get better returns for their investors. But Ackman questioned that purported goal on Friday in a Twitter feed.

“The day-to-day business of investment management doesn’t need the added incentive of lower taxation of interest carried to drive behavior,” he said. “Put simply, there should be no difference in the income tax rate of management fees that investment managers receive versus the incentive fees they receive, because these are simply fees under various forms… They don’t need the added boost of lower rates to motivate them to work better or harder for their clients.The fees are enough to motivate their behavior.

Ackman isn’t the only big name on Wall Street who has spoken out against the carried interest loophole. Berkshire Hathaway CEO Warren Buffett has been advocating for closing the loophole for more than a decade.

“If you think you should tax people who earn income on their profession, I think you should tax people on carried interest,” he told a congressional hearing in 2010.

Yet proponents of the current tax treatment of carried interest argue that changes to the tax code will hurt entrepreneurs.

“Increasing taxes on carried interest means that many entrepreneurial businesses and small businesses across all sectors will not have access to the capital they need to compete, scale, innovate and navigate difficult economic conditions,” the Small Business and Entrepreneurship Council said in a statement. Friday Statement. “It will only harm local economies and workers, and more broadly undermine the competitiveness of the United States.”

Drew Maloney, the CEO of the American Investment Council, also chastised attempts to close the tax treatment of deferred interest in statement Thursday.

“Over 74% of private equity investments went to small businesses last year,” he said. “As small business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on private capital that helps local employers survive. and grow.”

The Commercial Real Estate Development Association has also argue that the closing of carried interest “will have a disproportionate impact on the real estate sector since real estate partnerships include a large number of partnerships and many use a carried interest component in the structuring of development projects”.

And even Ackman noted Friday that deferred interest has value for entrepreneurs, allowing them to receive favorable tax treatment as a sort of payment for the risks they take that can spur economic growth.

“This system has resulted in enormous job and wealth creation and is the greatest engine of our economy. It must therefore be preserved at all costs,” he wrote. “Provide favorable tax treatment to entrepreneurs who create businesses, develop real estate, drill for gas, sequester carbon, etc. creates powerful incentives that stimulate these high-risk activities and present investment opportunities for passive investors who lack these capabilities.”

But when it comes to private equity and hedge fund managers, Ackman said the carried interest loophole adds no value.

“It doesn’t help small businesses, pension funds, other investors in hedge funds or private equity, and everyone in the industry knows it. It’s embarrassing and it should stop now,” did he declare.

This story was originally featured on Fortune.com



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