This Is the Loophole That’s Screwing Up the Tax System

People making $45k a year are paying a bigger share of taxes than billionaires like Blackstone’s Stephen A. Schwarzman.

By Sean Morrow, More Perfect Union

You likely pay a larger percentage in taxes than billionaire Stephen A. Schwarzman, the CEO and founder of Blackstone, pays for one of his main income streams.

Of course, you don’t pay more total than he does: billionaires pay some tax. But if you make more than $45,000 a year, you’re paying more per dollar than Schwarzman — the 28th richest person in the world, according to Forbes.

That’s because Schwarzman makes a lot of his money from something called carried interest. Hedge funds, private equity firms, and similar financial institutions invest money for their clients, and get paid a fee. They also get paid carried interest: 20 percent of all returns they made with their clients’ money.

That sounds a lot like income, right? Well it’s taxed as capital gains, which is generally taxed around 20 percent, not as income, which for someone making as much as Schwarzman would be taxed at nearly 40 percent. The pervasive “carried interest loophole” keeps it taxed at that lower rate, costing the government nearly $20 billion in lost revenue.

It’s a tax loophole that President Trump promised to fix multiple times. “The hedge fund guys are getting away with murder,” Trump said in 2015. “They're making a tremendous amount of money, they have to pay tax. These are guys that shift paper around and they get lucky. They make a fortune, they pay no tax, it's ridiculous.”

After he was elected to his first term, however, Trump did absolutely nothing about it. Coincidentally, Schwarzman became one of Trump’s biggest campaign boosters, and eventually wormed his way into the inner workings of Trump’s first presidency.

Trump wasn’t the first one to miss this opportunity. Early in his first term, President Barack Obama also pledged to close the loophole, and there was some momentum in Congress. At the time, Schwarzman compared the plan to slightly cut his billions to “when Hitler invaded Poland in 1939.”

Schwarzman even went after people in his own industry over the 2007 bill. Banker Leo Hindery Jr was set to testify in Congress about why carried interest should be taxed more, because Hindery also saw what is clear to all of us: that it’s income, not capital gains.

But Hindery got a phone call the night before his testimony: It was Schwarzman, who angrily called Hindery a “traitor,” and threatened to leave the business if his income tax rate changed. Hindery did go through with the testimony anyway, but the call illustrates how passionately Schwarzman feels about keeping his wealth accumulation un-hindered. No pun intended.

A decade later, when President Trump’s tax bill was coming together, Sen. Susan Collins of Maine introduced an amendment for a child tax credit that would be partially paid for by taxing carried interest as income.

She revoked the amendment the next day. Today, she’s the number one Senate recipient of private equity industry donations, which is surely a coincidence.

President Joe Biden also didn’t dare touch the hedge fund billionaires’ favorite loophole.

But now that supposed hedge fund taxation crusader and dealmaker Donald Trump is back in office, do Americans stand a chance of recouping these billions?

It’s unlikely: Schwarzman was again a big booster of Trump’s campaign, despite four years of waffling after President Trump allegedly tried to overthrow the government in January of 2021.

Beyond that, Trump picked Scott Bessent of Key Square Capital Management as Secretary of the Treasury. Remember, this is a guy that Trump had earlier said is “getting away with murder,” who “makes a fortune” and “pay no tax, it's ridiculous.”

Now he’s in charge of the IRS — at least nominally, as he’s already handed control over the Treasury’s payments system to Elon Musk, the world’s richest man.

By Sean Morrow, More Perfect Union

You likely pay a larger percentage in taxes than billionaire Stephen A. Schwarzman, the CEO and founder of Blackstone, pays for one of his main income streams.

Of course, you don’t pay more total than he does: billionaires pay some tax. But if you make more than $45,000 a year, you’re paying more per dollar than Schwarzman — the 28th richest person in the world, according to Forbes.

That’s because Schwarzman makes a lot of his money from something called carried interest. Hedge funds, private equity firms, and similar financial institutions invest money for their clients, and get paid a fee. They also get paid carried interest: 20 percent of all returns they made with their clients’ money.

That sounds a lot like income, right? Well it’s taxed as capital gains, which is generally taxed around 20 percent, not as income, which for someone making as much as Schwarzman would be taxed at nearly 40 percent. The pervasive “carried interest loophole” keeps it taxed at that lower rate, costing the government nearly $20 billion in lost revenue.

It’s a tax loophole that President Trump promised to fix multiple times. “The hedge fund guys are getting away with murder,” Trump said in 2015. “They're making a tremendous amount of money, they have to pay tax. These are guys that shift paper around and they get lucky. They make a fortune, they pay no tax, it's ridiculous.”

After he was elected to his first term, however, Trump did absolutely nothing about it. Coincidentally, Schwarzman became one of Trump’s biggest campaign boosters, and eventually wormed his way into the inner workings of Trump’s first presidency.

Trump wasn’t the first one to miss this opportunity. Early in his first term, President Barack Obama also pledged to close the loophole, and there was some momentum in Congress. At the time, Schwarzman compared the plan to slightly cut his billions to “when Hitler invaded Poland in 1939.”

Schwarzman even went after people in his own industry over the 2007 bill. Banker Leo Hindery Jr was set to testify in Congress about why carried interest should be taxed higher, because Hindery also saw what is clear to all of us: that it’s income, not capital gains.

But Hindery got a phone call the night before his testimony: It was Schwarzman, who angrily called Hindery a “traitor,” and threatened to leave the business if his income tax rate changed. Hindery did go through with the testimony anyway, but the call illustrates how passionately Schwarzman feels about keeping his wealth accumulation un-hindered. No pun intended.

A decade later, when President Trump’s tax bill was coming together, Sen. Susan Collins of Maine introduced an amendment for a child tax credit that would be partially paid for by taxing carried interest as income.

She revoked the amendment the next day. Today, she’s the number one Senate recipient of private equity industry donations, which is surely a coincidence.

President Joe Biden also didn’t dare touch the hedge fund billionaires’ favorite loophole.

But now that supposed hedge fund taxation crusader and dealmaker Donald Trump is back in office, do Americans stand a chance of recouping these billions?

It’s unlikely: Schwarzman was again a big booster of Trump’s campaign, despite four years of waffling after President Trump allegedly tried to overthrow the government in January of 2021.

Beyond that, Trump picked Scott Bessent of Key Square Capital Management as Secretary of the Treasury. Remember, this is a guy that Trump had earlier said is “getting away with murder,” who “makes a fortune” and “pay no tax, it's ridiculous.”

Now he’s in charge of the IRS — at least nominally, as he’s already handed control over the Treasury’s payments system to Elon Musk, the world’s richest man.

But Trump is still talking about it: in a Thursday morning meeting with GOP members of Congress, the president said closing the loophole is among his tax priorities this year. It’s a popular take–bankers should pay more taxes–but whether Congress agrees, and how far Trump is willing to push them, is another story.

As for Schwarzman, he appears to be set for life. So why should he continue to pay less per dollar on this income, not capital gains, than you do?