A growing coalition of Democratic senators is pressing President Donald Trump to fulfill his longstanding promise to close the carried interest loophole, a controversial tax break that allows private equity, hedge fund, and venture capital managers to pay capital gains tax rates on earnings that critics say should be taxed as ordinary income. Despite Trump’s repeated pledges, the loophole remains intact as congressional Republicans draft new tax legislation that excludes the change.
What Is the Carried Interest Loophole?
Carried interest is the share of profits that investment fund managers earn from the funds they manage. Instead of being taxed as ordinary income—subject to the top federal rate of 37%—these earnings are treated as long-term capital gains, taxed at a lower rate of 23.8%, including the net investment income tax.
- Fund managers typically receive a 2% management fee taxed as ordinary income and 20% of profits as carried interest taxed at the capital gains rate.
- This tax treatment has been criticized as unfair because it allows wealthy fund managers to pay a lower tax rate than many middle-class workers.
Tax experts like Steve Rosenthal have called the loophole a “misclassification” of compensation, arguing that carried interest should be taxed as wages.
Democratic Senators Renew Pressure on Trump
On May 18, 2025, ten Democratic senators—including Elizabeth Warren, Tammy Baldwin, Bernie Sanders, and Ron Wyden—sent a letter urging Trump to push Republicans to close the loophole in the upcoming tax reform package.
The senators warned:
- “The private equity sector has fought tenaciously to maintain these exceptional tax benefits.”
- “What remains uncertain is whether you will permit your party to stray from your commitments, yield to industry pressures, and once again fail to close the loophole.”
Despite Trump’s vocal opposition to the carried interest break during his 2016 campaign and subsequent years, the 2017 Tax Cuts and Jobs Act did not eliminate it, largely due to intense lobbying from Wall Street and resistance within the Republican Party.
Economic Impact of Closing the Loophole
Closing the carried interest loophole could raise significant federal revenue and reduce deficits:
- The Congressional Budget Office estimates that treating carried interest as ordinary income would raise approximately $13 billion over ten years.
- McKinsey & Company reported that private equity funds managed $8.2 trillion in assets in 2023, generating substantial carried interest earnings.
- The loophole’s preservation effectively costs taxpayers billions annually and contributes to income inequality.
However, opponents argue that eliminating the loophole could reduce investment and job creation:
- A 2021 study by the U.S. Chamber of Commerce warned that a 98% tax increase on carried interest could lead to the loss of nearly 5 million jobs and reduce tax revenues by $96 billion annually.
- Industry groups like the American Investment Council claim the tax break supports employment, small businesses, and local economies.
Trump’s Renewed Calls vs. Republican Resistance
President Trump has reiterated his desire to end the carried interest loophole, emphasizing fairness and closing tax loopholes benefiting the wealthy. White House officials confirmed discussions with Republican lawmakers about eliminating “special tax breaks” including carried interest.
Nevertheless, the initial draft of the 2025 tax reform bill released by House Republicans did not include closing the loophole, signaling ongoing resistance fueled by Wall Street lobbying.
Speaker Mike Johnson acknowledged pressure from interest groups, saying, “we want to do right by them,” indicating the political challenge of reforming this tax provision.
Broader Tax Reform and Political Context
The carried interest debate is part of a larger tax reform package aiming to:
- Make the 2017 individual tax cuts permanent.
- Adjust deductions and credits related to overtime pay, tips, and clean energy.
- Address Medicaid work requirements and other social program changes.
The tax reform faces scrutiny over its impact on the national debt and economic growth, with some fearing it will exacerbate inequality by preserving breaks like carried interest.
Public and Political Sentiment
Public opinion polls show broad bipartisan support for closing the carried interest loophole, viewing it as an unfair advantage for the ultra-wealthy. Yet, the powerful financial industry’s lobbying efforts have so far stymied reform.
Democrats argue that closing the loophole is a matter of tax fairness and fiscal responsibility, while many Republicans remain wary of disrupting Wall Street’s influence and potential economic consequences.
Summary
Democratic senators are intensifying pressure on President Trump to close the carried interest loophole, a tax break that allows wealthy Wall Street fund managers to pay lower rates than ordinary workers. Despite Trump’s campaign promises and recent calls, resistance from industry lobbyists and some Republicans has delayed action. The debate over carried interest remains a key flashpoint in broader tax reform discussions, reflecting tensions between demands for fairness and concerns about economic competitiveness.
