The president’s deregulatory policies were supposed to unleash animal spirits for the nation’s deal makers. Some of those animals, it turns out, may bite.
Trump’s hyperactive first three weeks, including inflationary tariffs and DOGE’s government wrecking ball, are clouding what had been a bullish business and investment outlook and rattling even some of his wealthy acolytes. “The risk is that the policy mix is tilting (perhaps unintentionally) into a business-unfriendly stance,” JPMorgan Chase’s chief economist Bruce Kasman warned clients last week.
Perhaps the most unnerving curveball thrown for private equity managers is Trump’s proposal, floated late last week, to eliminate a cherished tax break. The carried interest tax loophole treats private equity “carry” – the 20% share of profits from a fund’s investments that managers keep for themselves — as capital gains, which are taxed at a much lower rate than earned income. Critics argue that fund managers are investing their limited partners’ money, and therefore the gains should be treated as wages.
Such carried interest makes up the bulk of PE managers’ revenues; their annual management fees, generally 2% of assets under management, are taxed as ordinary income.
Impact funds
Democrats have long urged an end to the carried interest loophole, but Trump’s embrace of the crusade took some managers by surprise. Silicon Valley venture capitalists such as Andreessen Horowitz had rallied around his campaign in part over then-President Biden’s plans to tax billionaires’ unrealized gains.
Many of Trump’s inner circle, including Commerce Secretary Howard Lutnick, Treasury Secretary Scott Bessent and Vice President JD Vance, hail from private equity firms that benefit from the carried interest tax break.
While there may be few populist tears for billionaire investors, ending the carried interest tax treatment could hurt impact funds, especially small and emerging managers with lower fee revenues.
Impact GPs are divided. Ending the tax break could harm impact investment funds that are generating positive outcomes. And carried interest is one lever that can catalyze more impact investment.
One idea: carving out an exemption for smaller funds, the way small businesses are sometimes spared the full burden of other regulations, or for funds that generate positive social outcomes.
Tax cuts
Private equity managers have mostly been silent on the proposed changes to carried interest since Trump unveiled it as part of his broader tax strategy last week. One reason: the extension of Trump’s 2017 tax cuts and reduced corporate tax rates will help offset some of that loss.
They also may be hoping that Trump is just saber rattling and will back down in the face of private lobbying. In his first term, Trump tried to end the loophole but eventually compromised by increasing the holding time, from one to three years, to qualify for long-term capital gains rates. A compliant Congress may be more willing to go along with Trump this time.
