Why Jeb Bush’s attack on ‘carried interest’ matters

Sep 9, 2015 04:55 PM ET

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Get ready to hear a lot more about so-called “carried interest” this campaign season, and beyond.

With Jeb Bush joining Donald Trump in targeting the current treatment of carried interest — in which some investment managers are permitted to pay lower tax rates on much of their compensation — the issue is about to heat up on the campaign trail. And its odds of being included in a future comprehensive tax-reform bill are also greater, thanks to Bush and Trump, say analysts.

Also read: Jeb Bush wants to lower taxes, limit deductions.

Never mind if former Florida Gov. Bush would have gone after carried interest if Trump hadn’t first. The two Republicans have injected new life into the issue, making it a talking point for the GOP and not just Democrats.

“Realistic, establishment GOP presidential candidate Jeb Bush including carried interest in his first-ever tax-reform plan and the leading [Republican] candidate Donald Trump touting it specifically represents a new era for the issue,” said Henrietta Treyz of Height Securities in an email to MarketWatch. She said their attacks on carried interest “further increases our already-high odds of 60% that in any comprehensive tax-reform bill carried interest tax rates will be increased.”

Jorge Castro, a former senior IRS official and congressional tax aide, said the politics of the issue have shifted significantly with Bush and Trump wanting to eliminate the preferential treatment for carried interest.

“As Congress continues to lay the groundwork on tax reform, I expect the issue of carried interest to be addressed and receive bipartisan support,” Castro, who now runs tax-consulting firm Castro Strategies, told MarketWatch in an email.

Both Treyz and Castro expect Congress and a new president to address comprehensive tax reform in 2017.

Going after any tax preference can be risky for Republicans. On Tuesday, Florida Sen. Marco Rubio said if Trump wants to raise taxes, he should change his party.

“I don’t know what problem that solves,” Rubio told Boston Herald Radio. “That seems to me like a solution in search of a problem. If someone wants to raise taxes, they should run as a Democrat.”

Anti-tax group Americans for Tax Reform said Bush’s plan would raise taxes on carried interest capital gains to 28% from 23.8%, and that “no Republican should be for higher taxes on capital gains.”

While targeting the carried interest break may have populist appeal, it’s not necessarily a boon for the budget. In a blog post published this week, Scott Greenberg of the Tax Foundation points to the most recent congressional Joint Committee on Taxation figures, showing that changing the tax treatment would raise just $1.32 billion in 2016 and $15.64 billion over ten years.

“When it comes to federal revenues, the treatment of carried interest is essentially pocket change,” he wrote.

But whatever the benefit to federal coffers, the issue appears here to stay at least through the presidential campaign, and not just on the left.

“The taxation of carried interest has transcended traditional party politics and become a populist issue that will undoubtedly play a central role in the economic platforms of candidates from both parties,” says analyst Isaac Boltansky of Compass Point Research & Trading.