David Camp’s Tax Reform Plan Sets Sights On Private Equity

David Camp’s Tax Reform Plan Sets Sights On Private Equity

David Camp’s plan contemplates a cut in the top corporate income tax rate to 25% from 35%, while targeting big banks.

However, private equity executives seem confident that tax changes won’t be imminent.

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Sweeping tax reform

Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, Wednesday proposed a sweeping personal and business tax overhaul, including changes to how carried interest is treated. The proposed bill also includes a revival of the so-called enterprise tax, which would treat publicly-traded private equity firms like corporations.

However, the actual amount that private equity and venture capital firms would be taxed on carried interest under the Camp’s proposal would be difficult to compute.

Dan Primack of Fortune believes David Camp could have simply reclassified carried interest as ordinary income. However, the effective tax rate calculation as proposed by Camp would include such variables as carry-over taxes from past years.

David camp is underestimating the extra revenue

Dan Primack of Fortune points out David Camp is underestimating the amount of extra federal revenue that would accrue from the proposal bill by assuming the 35% rate. While David Camp anticipates $3.1 billion, Dan Primack believes the difference between the current long-term effective tax rate of 25% and the approximate Camp-proposed 35% rate would be around $7.7 billion.

Thus, Dan Primack believes the actual amount would be more than two times the Joint Committee on Taxation’s projections.

Proposal invites criticism

The proposal from David Camp, a Michigan Republican, is already being criticized by the top lobbyist for the private equity industry and some term the proposal as ‘unfair’.

Senator Mitch McConnell of Kentucky believes the proposed overhaul had no chance of becoming law. Private equity investment profits, known as carried interest, are currently taxed as capital gains, at a significantly lower rate than ordinary income. However, David Camp’s proposal involves raising the tax on carried interest to 35% from the current 23.8% rate for the highest earners.

David Camp’s proposal stipulates that the profits derived by private equity fund and paid to its managing partners through management fees and a profits interest in the partnership should be treated as ordinary income. Steven Rosenthal of the Tax Policy Center points out David Camp’s proposal involves taxing the compensation of private equity managers at ordinary rates rather than lower capital gains rates.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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