The tax-overhaul plan unveiled on Thursday by House Republicans would leave intact a loophole that benefits hedge funds, private-equity funds and other investment managers, despite President Trump’s campaign promises to eliminate it.
The proposal collapses several individual income tax brackets, slashes the corporate tax rate, targets income held overseas by companies and caps a popular deduction for mortgage interest. But while it eliminates many deductions and loopholes, the plan preserves the so-called carried-interest provision — a section of the tax code that is beloved by, and hugely valuable to, private-equity and other Wall Street investors.
A substantial portion of the compensation of hedge-fund and private-equity executives is derived from the investment gains that their funds generate. Under the current tax code, that compensation is treated as capital gains, meaning it is taxed at a rate of 23.8 percent, well below the 39.6 percent income-tax rate that now applies to the top tier of individual earners.
Democrats and some Republicans have long pushed to end the carried-interest provision and to stop treating this income tied to it as investment profits for tax purposes. They argue it is an unwarranted tax break for the richest of the rich.
The push has angered many people on Wall Street.
“It’s like when Hitler invaded Poland in 1939,” Stephen A. Schwarzman, the chief executive of Blackstone Group, one of the world’s largest private-equity firms, declared in 2010. He later apologized for making what he said was an “inappropriate analogy.”