‘A stain on the tax code’: Hedge fund legend Bill Ackman urges Biden to close loophole that saved him billions

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William Ackman is not known for his political views. Typically, the billionaire hedge fund manager spends his time dissecting corporate finances in search of his next high-profile investment or activist game.

But this week, the CEO of Pershing Square Capital Management found himself in the middle of a heated debate over the carry rate “loophole” — allowing private equity and hedge fund managers to reduce their tax burden on fund investment gains. It’s an important part of tax law that has helped so many hedge fund managers like Ackman become billionaires.

Democrats have been working to close the interest rate loophole as part of the proposed $739 billion Inflation Reduction Act of 2022, and many hedge fund managers have risen in opposition, but not Ackman.

“The loophole on the carry rate is a blot on the tax code,” Ackman said in a… Thursday tweet.

While a billionaire hedge fund manager may seem like an unlikely mainstay in Democrats’ fight against fiscal loopholes, Ackman has been advocating closing the carry rate loophole for a decade now.

But before you jump into the billionaire’s beef with interest borne, it’s best to define some key terms.

Driven interest: a ‘loophole’ or an entrepreneur’s best friend?

Private equity and hedge funds make money in two main ways. First, they charge a basic management fee on the total amount a client has invested. Second, they earn a portion of the profits from their fund’s investments if they achieve a minimum return known as the threshold. All profits earned by managers above the threshold are called carry interest.

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The carry rate provision allows fund managers to pay a capital gains tax rate (about 20%) on this income, rather than the much higher regular income tax rate (37% for single filers’ taxable income above $539,900).

This tax treatment, or “loophole,” depending on who you ask, should incentivize money managers to get better returns for their investors. But Ackman questioned this alleged goal on Friday in a… Twitter thread.

“The day-to-day activity of investment management doesn’t need the added incentive of a lower carry-interest tax to drive behavior,” he said. “Simply put, there should be no difference in the tax rate on the management fee income that investment managers receive compared to the incentive fees they receive, as they are just fees in different forms… They don’t have the added boost of lower rates needed to motivate them to work better or harder for their customers. The fees are sufficient to motivate their behaviour.”

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Ackman isn’t the only big name on Wall Street speaking out against the interest rate loophole. Berkshire Hathaway CEO Warren Buffett has been calling for closing the loophole for more than a decade.

“If you believe in taxing people who earn income from their profession, I think you should tax people based on interest,” he said in a 2010 congressional hearing.

Still, proponents of the current interest-bearing tax treatment argue that changes in tax law will harm entrepreneurs.

“Raising carry-rate taxes means many entrepreneurial and small businesses across industries are unable to access the capital they need to compete, scale, innovate and navigate challenging economic conditions,” he said. the Small Business and Entrepreneurship Council in a statement Friday. “This will only hurt local economies and workers, and more broadly undermine U.S. competitiveness.”

Drew Maloney, the CEO of the American Investment Council, also rebuked attempts to cut off the interest-based tax treatment a statement from Thursday.

“Last year, more than 74% of private equity investments went to small businesses,” he said. “As small business owners face rising costs and our economy faces severe headwinds, Washington should not push ahead with a new private capital tax that helps local employers survive and grow.”

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The Commercial Real Estate Development Association also states that closing the carry rate “will have a disproportionate impact on the real estate industry, as real estate partnerships include a large number of partnerships and many use a carry-rate component in structuring development companies.”

And even Ackman noted Friday that carry-rate has value to entrepreneurs, giving them favorable tax treatment as a kind of payment for the risks they take that can boost economic growth.

“This system has led to massive job and wealth creation and is the biggest engine of our economy. It must therefore be preserved at all costs,” he wrote. “Giving favorable tax treatment to entrepreneurs who build businesses, develop real estate, drill for gas, sequester carbon, etc. creates powerful incentives that encourage these risky activities and provides investment opportunities for passive investors who do not have these opportunities.”

But when it comes to private equity and hedge fund managers, Ackman said the interest rate loophole doesn’t add any value.

“It doesn’t help small businesses, pension funds, other hedge fund investors or private equity investors, and everyone in the industry knows it. It’s a shame and it should stop now,” he said.

This story was originally on Fortune.com

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