Manchin-Schumer spending bill targets tax loophole favored by investors

Closing popular tax loophole used by hedge fund managers could generate $14B, Democrats say

The surprise reconciliation bill unveiled this week by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin abandons many of the tax promises made by President Biden in the early days of his presidency.

But the tax, climate and health care proposal outlined Wednesday, if passed, would still mark one of the largest tax hikes in decades

The initiative, repackaged by Democrats as the Inflation Reduction Act of 2022, would raise an estimated $739 billion over the next decade by increasing IRS funding, establishing a 15% minimum corporate tax targeting companies' book income, allowing Medicare to negotiate prescription drug costs and closing a popular tax loophole used by private equity and hedge fund managers.

Manchin, D-W.Va., and Schumer, D-N.Y., proposed repealing the break for carried interest, which allows private equity fund managers to pay lower taxes on their earnings than they would for regular income. 


Senate Majority Leader Chuck Schumer

Senate Majority Leader Chuck Schumer, D-N.Y., speaks to reporters during a news conference at the U.S. Capitol July 28, 2022. (Drew Angerer/Getty Images / Getty Images)

Under the loophole, an investment manager's income can be taxed as a capital gain — a 23.8% levy — rather than regular income, which is taxed at 37.9%.

Requiring fund managers to pay taxes on their profits would raise an estimated $63 billion over the next decade, according to a previous estimate from the Joint Committee on Taxation. The Democrats projected it would raise about $14 billion over the next year.

The plan has already elicited fierce criticism from industry groups, including the American Investment Council, a private equity lobbyist group based in Washington. 

Sen. Joe Manchin

Sen. Joe Manchin, D-W.Va., leaves the U.S. Capitol following a vote Aug. 3, 2021. (Kevin Dietsch/Getty Images / Getty Images)


"Over 74% of private equity investment went to small businesses last year," AIC President Drew Maloney said in a statement. "As small business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow."

Revenue raised by the policies would go toward initiatives designed to combat climate change and curb pharmaceutical prices, as well as efforts to reduce the nation's $30 trillion debt. It includes about $433 billion in new spending, while roughly $300 billion of the new revenue raised would go toward paying down the nation's deficit, a priority for Manchin.

Sen. Kyrsten Sinema

Senate Aviation and Space Subcommittee ranking member Sen. Kyrsten Sinema questions witnesses during a hearing in the Dirksen Senate Office Building on Capitol Hill May 14, 2019. (Chip Somodevilla/Getty / Getty Images)

"This is the action the American people have been waiting for. This addresses the problems of today — high health care costs and overall inflation — as well as investments in our energy security for the future," Biden said in a statement.


Still, it is unclear whether this particular tax proposal will make it into the final legislation. Sen. Kyrsten Sinema, D-Ariz., is a crucial vote in the 50-50 Senate and, in the past, declined to support ending the break for carried interest. A spokesperson for Sinema has said she is still reading the legislation and has not yet made a decision on whether to support it.