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QUICK FIX
What usually happens when policymakers try to tax private equity profits? Play it again, Sam.
The president tells Congress that it’s time to close a major tax loophole that largely benefits the private equity industry. Lawmakers float legislation that would raise taxes on the industry’s profits, which are known as carried interest. Finally, after months of campaigning, the PE tax policy changes approved by Congress are minor, nonexistent or ultimately benefit major investment firms.
President Donald Trump is trying to tear up that script. The president wants to raise taxes on private equity profits to help pay for populist campaign promises like eliminating taxes on overtime, tipped income and Social Security benefits. Republican lawmakers are scrambling to find revenue to chip away at the gargantuan deficits that will come with the extension of Trump’s 2017 tax cuts. And Trump is starting this fight with significantly more clout than in earlier battles over PE’s golden goose, with a growing contingent of GOP lawmakers behind him who are wary of Wall Street’s influence in Washington.
“Trump has a lot more power in this negotiation than he did in even 2017, and I think he knows that. I think we see that in all the other elements of his governance style,” said Russ Sullivan, the chair of Brownstein Hyatt Farber Schreck’s national tax policy group and a longtime top adviser to former Senate Finance Chair Max Baucus (D-Mont.). “If he really wants to make that happen, he's going to make that happen.”
Private equity has a storied history of beating back similar efforts. But Trump’s latest attempt comes as more Republicans are echoing what has typically been Democratic talking points about the industry’s profits.
Progressives like Sen. Elizabeth Warren (D-Mass.) and Rep. Pramila Jayapal (D-Wash.) have long maintained that carried interest collected by fund managers should be taxed at ordinary income rates as high as 37 percent, rather than the 20 percent rate applied to long-term capital gains. Even though private equity investments are mostly funded through institutional investors and the wealthy, industry executives say that their contributions in the form of time, energy and expertise is “sweat equity” that entitles them to a lower tax rate.
Industry lobbyists clocked a telling exchange during last week’s markup of the House GOP’s budget resolution when Rep. Chip Roy (R-Texas) praised Jayapal for “being in complete agreement with Donald Trump in wanting to remove the carried interest loophole.”
“We have consensus,” chuckled House Budget Chair Jodey Arrington (R-Texas).
For now, industry officials are hopeful that Republican leaders like Majority Leader John Thune of South Dakota and Senate Finance Chair Mike Crapo of Idaho will continue to serve as a firewall against any push to treat carried interest as ordinary income. But newer members, particularly in the House, may not place as much of a premium on the private equity’s interests as their predecessors. When asked about carried interest by The Hill last week, House Ways and Means Chair Jason Smith (R-Mo.) said “every provision is on the table.”
The American Investment Council, which represents many of the largest PE firms, is once again circulating memos highlighting how the industry’s investments support 12 million U.S. jobs and deliver critical returns for public sector retirement plans. Notably, before Trump put carried interest back on the menu, the AIC put out a report last month detailing the industry’s investments in the states and districts represented by newly elected members.
National Venture Capital Association President and CEO Bobby Franklin, whose members would also be affected by Trump’s proposal, told Declan that “all the pain” from changing carried interest’s tax treatment would fall on smaller venture funds while doing little to raise revenue. (The Congressional Budget Office estimates taxing carry as income would reduce the deficit by $13 billion over the next decade.)
“This is symbolic. This is because somebody won the argument about calling it a loophole, which it is not,” he said. “So we have to go up there and educate — over and over and over again.”
IT’S TUESDAY — Of course, no one in Casablanca ever says, “Play it again, Sam.” But it’s a killer line. Have tips, thoughts or suggestions? Email Sam at ssutton@politico.com
Driving the Week
Tuesday … The American Bankers Association Conference for Community Bankers is underway in Phoenix, with appearances by San Francisco Fed President Mary Daly and Acting Comptroller of the Currency Rodney Hood … Federal Reserve Vice Chair for Supervision Michael Barr will speak about artificial intelligence and financial stability at a Council on Foreign Relations event at 1 p.m. … The Neighborhood Reinvestment Corp.’s board of directors will meet at 2 p.m. …
Wednesday … Housing starts and business permits data for January will be released at 8:30 a.m. … Minutes of the Fed’s January meeting will be released at 2 p.m. … Fed Vice Chair Philip Jefferson will speak at Vassar College at 5 p.m. …
Thursday … Chicago Fed President Austan Goolsbee will participate in a moderated Q&A at the Chicagoland Chamber Mid-Market Chicago event at 9:35 … The Cato Institute holds a briefing on “Tax Reform for Fundamental Health Reform: The Missing Piece in the Budget Fight” at noon … Barr will speak at a Georgetown University Law Center discussion on supervision and regulation at 2:30 p.m. … Fed Gov. Adriana Kugler will deliver a lecture on post-pandemic inflation at the Georgetown University McCourt School of Public Policy
Friday … University of Michigan’s consumer sentiment survey for February will be released at 10 a.m. … Jefferson will give a speech on “Central Bank Communication” at the San Francisco Fed’s Macroeconomics and Monetary Policy Conference at 11:30 a.m. …
Post-conflict of interest policies — Trump over the weekend invoked a quote that’s been widely attributed to Napoleon Bonaparte: “He who saves his Country does not violate any Law,” he wrote on Truth Social. It’s in keeping with Trump 2.0’s blend of personal business interest and policy, write The NYT’s Eric Lipton and Maggie Haberman: Trump’s “business ventures have created a climate for potential conflicts unlike any other U.S. president. And the list of matters sparking controversy in the second Trump administration is extensive.”
— And speaking of conflicts, Declan reports that Trump’s pick to lead the Commodity Futures Trading Commission Brian Quintenz’s work at Andreessen Horowitz’s crypto fund and on the board of the CFTC-regulated financial exchange Kalshi “are raising ethical questions about how he will navigate crafting new regulations around issues like crypto and the prediction markets.”
Have intel on these meet-ups? Hit me up — In an appearance on Face the Nation on Sunday, National Economic Council Director Kevin Hassett said he would meet regularly with Fed Chair Jerome Powell to exchange views on the economy. “Jay and I have a long and collegial relationship,” Hassett said. “Jay’s an independent person, and the Fed’s independence is respected. The point is, the president’s opinion can be heard. He’s the president of the United States.”
Eggs ain’t getting cheaper… — The Trump administration's sweeping cuts have hit a small USDA office that is critical to the government’s response to the spread of bird flu, Marcia Brown reports.
Incoming — Declan reports that Elon Musk’s Department of Government Efficiency is expected to arrive at the Securities and Exchange Commission in the coming days. “They are at the gates,” said one person who was granted anonymity to speak freely.
DOGE WATCH
Attack DOGE — DOGE affiliates are also trying to access the IRS’s Integrated Data Retrieval System, which contains detailed financial information about millions of taxpayers — including their tax returns, Toby Eckert and Megan Messerly report. Democrats struck a familiar refrain at the billionaire Trump adviser’s latest incursion: “This is a five-alarm warning,” Rep. Jimmy Gomez (D-Calif.), a member of the House Ways and Means Committee, which oversees the IRS, said in a post on X, calling the move an “illegal and blatant power grab.”
At the CFPB — Mass layoffs at the Consumer Financial Protection Bureau are on hold — at least for now. Michael Stratford reports that U.S. District Judge Amy Berman Jackson blocked the CFPB from terminating additional employees after the Trump administration this week fired dozens of agency workers, including an entire team of people scrutinizing Big Tech companies’ financial products.
At Treasury — Stratford also reports that Treasury’s acting Inspector General Loren Sciurba and the Government Accountability Office have opened separate inquiries into DOGE’s access to sensitive Treasury payment systems.
At HUD — DOGE’s work at the Department of Housing and Urban Development could slash hundreds of millions of dollars in contracts and lay off as much as half the workforce, Mohar Chatterjee, Sophia Cai and Sam report.
Broader efforts to block Musk are hitting headwinds — While DOGE’s activity remains opaque, U.S. District Judge Tanya Chutkan seemed poised to reject an effort to bar Musk and his allies from accessing data or firing federal workers, Kyle Cheney and Josh Gerstein reported on Monday.
Leverage game — The NYT’s Constant Méheut, Andrew E. Kramer, David E. Sanger and Eve Sampson: “President Volodymyr Zelensky of Ukraine, during a closed-door meeting on Wednesday, rejected an offer by the Trump administration to relinquish half of the country’s mineral resources in exchange for U.S. support, according to five people briefed on the proposal or with direct knowledge of the talks.”
Never happened — A little less than five years after George Floyd’s murder by a Minneapolis police officer forced a corporate reckoning of racism in America, big banks are stripping their websites of any mention of diversity, equity and inclusion policies to “avoid winding up in the crosshairs of a legal landscape increasingly hostile toward it,” write The WSJ’s AnnaMaria Andriotis and Gina Heeb.
Favorite Steely Dan rugpull? Gotta be ‘Gaucho’— The Associated Press: “Argentine lawyers filed fraud charges against President Javier Milei in criminal court on Sunday for promoting a cryptocurrency on his social media.”
