'Fist bumps' at hedge funds over Trump's tax plan

Wed Apr 26, 2017 4:33pm EDT
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By Svea Herbst-Bayliss and Jennifer Ablan

BOSTON/NEW YORK (Reuters) - U.S. hedge fund managers began warming to President Donald Trump soon after his surprise election ignited a powerful stock market rally. Now, his dramatic tax cut plans give them even more reasons to cheer.

Trump, looking to make good on pledges for sweeping tax reform, on Wednesday unveiled plans for a cut in the tax rate to 15 percent for so-called pass-through businesses. While the proposal is being billed as a boon for small businesses from pizzerias to investment management firms, one clear winner looks to be the hedge fund set, where owners can earn hundreds of millions in income a year, tax experts, managers, and their lawyers said on Wednesday.

"For hedge funds, this is an unmitigated benefit as their tax liabilities could drop significantly," said Robert Willens, an independent tax consultant. "Obviously, they are quite enthusiastic and there may be a few fist bumps along the way."

A manager whose hedge fund earns $50 million a year, for example, would be paying some $19.8 million in taxes, or 39.6 percent, under the current rules. That could drop to as little as $7.5 million if the rate were cut to 15 percent.

To be sure, Trump's plan has a long, hard road to becoming reality, but that didn't stop fund managers from blitzing their tax lawyers with calls about how to play it. Most attorneys advised patience, saying they would need to wait at least until early June, when a bill with more specific language might be hammered out.

"If the goal is to get people talking, then it is working," said Jeffrey Parker, a partner at law firm EisnerAmper. "A proposal is just a proposal. The final version often differs significantly from the final draft."

Aside from the pass-through proposal, an open question is what kind of treatment will be given to so-called carried interest. That allows managers to pay a tax rate as low as 20 percent, a loophole that Trump has railed against in the past.

Similarly, there is no clarity on whether businesses would be required to pay "reasonable compensation" to their managers, income that could be taxed at a higher rate, experts said. Including that could help Trump appeal to his base and mollify critics who say the plan is a giveaway for millionaires.   Continued...

U.S. President Donald Trump  in Washington, DC, U.S. April 26, 2017. REUTERS/Carlos Barria