American Families Plan Could Change Taxes on Capital Gains, Hedge Fund Income

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A memo released by the White House ahead of President Biden’s speech in a joint session of Congress this afternoon has outlined his plans to increase taxes on the wealthiest Americans and eliminate carried interest for hedge funds.

The memo states that the president is “calling on Congress to close the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income just like every other worker. While equalizing tax rates on wages and capital gains will address this disparity, permanently eliminating carried interest is an important structural change that is necessary to ensure that we have a tax code that treats all workers fairly.”

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Hedge funds and private equity have fought for years to keep the long-coveted tax break.

In addition to their salaries, hedge fund managers rely on a share of the appreciation in the assets they oversee, called carried interest. These profits are taxed as capital gains, which is always a rate much lower than the top marginal income tax rate on income that most pay.

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For example, the top marginal tax rate on income is currently 37%, whereas long-term capital gains tax caps out at around 20%.

This is not the first time a politician has attacked carryover interest. President Obama was a large voice against the tax break in 2015 to Congress, and former Secretary of State Hillary Clinton has actively advocated against it for the past 15 years. President Trump also attempted to eliminate the loophole in 2017, calling hedge fund managers “paper pushers” who were “getting away with murder,” but The New York Times reported that ” lobbyists kept it alive.”

See: Richest 1% Responsible for 36% of Unpaid Federal Income Taxes
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It is a long-contentious issue between Washington and Wall Street, and whether Biden will be the one to cut the hedge fund loophole remains to be seen.

In another controversial proposal, Biden included that “households making over $1 million — the top 0.3% of all households — will pay the same 39.6% rate on all their income, equalizing the rate paid on investment returns and wages.”

Stocks took a tumble when news first broke of Biden’s tax increases last week, The NYT reported.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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