Donald Trump famously promised to close a multibillion-dollar tax loophole that benefits private equity and hedge fund managers — and his top aide blamed Congress for the failure to do so. Left unsaid: As the financial industry has lobbied key agencies like the IRS, Trump’s administration has declined to use its rulemaking authority to try to limit the loophole — a refusal that personally enriches Trump’s top outside adviser, as well as executives at his aides’ former Wall Street firms.

Also left unmentioned: Trump just signed a tax bill that includes language that could prevent any subsequent president from using executive action to close the loophole in the future.

At issue is “carried interest” — a term that describes performance fees paid to hedge fund, private equity and real estate investment executives when they earn profits for investors. Thanks to a series of IRS interpretations over the last two decades, the executives are right now permitted to classify those fees as capital gains rather than as regular income, which lets them pay a much lower tax rate on the earnings. The loophole allows finance industry titans to avoid paying roughly $2 billion of taxes a year, according to the Congressional Budget Office. Billionaire Warren Buffett has described the situation as allowing Wall Street executives to pay a lower effective tax rate than their secretaries pay.

Trump’s recent tax legislation did not include language to statutorily end the loophole because, as his economic adviser Gary Cohn asserted, “The reality of this town is that constituency [Wall Street] has a very large presence in the House and the Senate, and they have really strong relationships on both sides of the aisle.” But experts have long contended that Trump could simply revise the rule that creates the loophole — a move he has refused to take.

“If the Trump administration wanted to, they could have easily done so and let the courts decide,” Daniel Shaviro, Professor of Taxation at New York University Law School, told  International Business Time. “After all, it's not as if they've been shy about testing their executive powers, say in the immigration area.”

Trump has indeed displayed enthusiasm for executive action, even in cases in which experts say he is going beyond his legal authority. In his first year in office he has issued orders to restrict immigration, slash financial regulations, increase fossil fuel drilling and impose sanctions on foreign countries — moves that have drawn not just criticism, but at times court challenges and judicial rebukes.

And yet, Trump has taken no executive action on carried interest despite explicitly campaigning on a promise to address the situation. His spokesperson said he has no such power.

“The so-called loophole exists because of partnership law,” Lindsay Walters, White House Deputy Press Secretary, told IBT by email. “It cannot be closed through executive action. It requires a statutory change.”

That uncharacteristically deferential posture has not been struck in a vacuum. Trump’s refusal to try to limit the carried interest loophole has been a financial windfall for the industry that he has relied on to staff his top economic posts — and that his aides have had personal financial stakes in. For instance:

  • Cohn was the president of Goldman Sachs, and his financial disclosures list investments in private equity funds.
  • Commerce Secretary Wilbur Ross ran his own private equity firm and lists private equity holdings on his disclosure forms. In its most recent SEC filings, his former firm, WL Ross, says its earnings rely on carried interest and warns about “changes in law and regulation and in the enforcement of existing law and regulation, such as antitrust laws and tax laws.”
  • Treasury Secretary Steve Mnuchin — who could craft the revised rule — ran a hedge fund, and also detailed personal investments in such vehicles on his federal financial disclosure form. Mnuchin has said he is divesting himself from those holdings, but he has also pledged to recuse himself from matters that affect those investments — even as he forged a legislative compromise that preserves the loophole.
  • There is also Steve Schwarzman, the Blackstone CEO whom Trump appointed to run his White House Strategic and Policy Council, and who feted Trump at a fundraiser at his Manhattan home during the final negotiations over the tax bill. Schwarzman’s firm is one of the world’s largest private equity players, and he has likened the effort to end the carried interest loophole to the Nazi invasion of Poland.

Blackstone’s interest in preserving the loophole was articulated most recently in its annual shareholder report, which noted that changes to the tax treatment of carried interest could affect its bottom line. It specifically warned that “during his presidential campaign, President Trump expressed support for legislation ending treatment of carried interest as capital gain. If federal, state or local legislation to treat carried interest as ordinary income rather than capital gain for tax purposes were to be enacted, we and possibly our unitholders would be required to pay a materially higher amount of taxes.”

‘Executive Action Would Be Legal’

Despite White House assertions about limits to the president’s executive authority, the carried interest regulation on the books explicitly declares that the rules are “prescribed by the Secretary [of the Treasury].” That language has led experts to argue that presidential administrations, past and present, did not need to rely on Congress to close the loophole.

“Taxing fund managers at ordinary rates on their labor income would correct an injustice that exacerbates income inequality and allows an unnecessary tax subsidy to flow to the richest one percent of the one percent,” wrote University of California law professor Victor Fleischer in a 2015 policy paper directed at the Obama administration. “Taxing carried interest as ordinary income advances efficiency, equity, and administrability. Doing so promptly through executive action would be legal, sensible, wise, and just.”

Alan Wilensky — a former Clinton Treasury Department official when one of the key carried interest interpretations was first issued — has agreed, arguing that a president can rescind the key ruling that first created the loophole.

“The president can have his Treasury secretary, who supervises the IRS, revoke [the ruling] and its progeny as it applies to hedge funds and similar investment vehicles and issue guidance clarifying that ‘carried interest’ is taxed as ordinary income in the same manner as the annual management fee,” he wrote in a 2016 article for Tax Notes that lauded then-candidate Trump for criticizing the loophole and urged the Obama administration to take action.

The financial industry is well aware of the potential for the executive branch to end the loophole on its own — and key players from that industry have in recent months targeted their lobbying at the specific government agencies which would be involved in a rule change, according to federal records reviewed by IBT.

The powerful American Investment Council, for instance, lobbied not only the White House on carried interest, but also the Treasury Department, which would be involved in revising the rule that creates the loophole. Schwarzman’s Blackstone is one of the AIC’s members.

The real estate industry also lobbied the executive branch on carried interest through the National Apartment Association, which directed its political influence at Congress but also at the IRS — another agency that could be involved in a rulemaking process to close the loophole. The Building Owners and Managers Association International lobbied the Treasury Department to “maintain treatment of carried interest in a real estate partnership as capital gains,” according to federal disclosures.

While Cohn tried to blame the persistence of the loophole on Congress, his own National Economic Council was directly lobbied on the issue by the Managed Funds Association, which counts his own former employer as a member. Cohn received a $285 million payout from Goldman upon being appointed to his government job.

‘More Difficult For Treasury To Get Rid Of Carried Interest’

Beyond Trump refusing to take executive action to close the carried interest loophole, some experts say the tax bill Trump just signed was also structured in a way that may now block any future president from closing it.

Included in that legislation was a provision declaring that the preferential carried interest tax rate could apply only to investments that are held for at least three years, rather than just one. Trump has depicted this as a victory over Wall Street — even though the provision will not affect many private equity and real estate investment firms, which typically hold assets for longer.

As important: the language concurrently complicates any future executive branch action to fully close the loophole for good, according to University of Chicago law professor Daniel Hemel. He told IBT that because Congress has now weighed in on the issue in general, a president may face new obstacles to executive action.

“If Treasury tried to use its preexisting authority, it would run into the powerful counterargument that the specific trumps the general,” Hemel said. “That is, Congress has spoken to this question explicitly, and so Treasury should follow Congress’s command.”

He added: “In a nutshell: It would be considerably more difficult for Treasury to get rid of carried interest by executive action today than it was before the GOP tax bill passed.”

Alex Kotch contributed to this story.

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