Trump’s Carried Interest Crusade against Private Equity

Donald Trump is reigniting a long-standing battle on Wall Street. The former president has once again set his sights on eliminating the carried-interest tax loophole - a move that could disrupt the private equity (PE) and hedge fund industries while also reshaping tax policy debates ahead of the 2024 elections. In a recent White House meeting with Republican congressional leaders, Trump outlined his tax priorities, including closing the carried-interest loophole, eliminating tax breaks for billionaire sports team owners, and removing income tax on tips. The revival of this tax reform effort, which Trump previously championed in 2017 but ultimately failed to pass, signals a renewed push to reshape financial taxation in America.

The Carried-Interest Debate: A Long-Standing Wall Street Battle

At the heart of the debate is the preferential tax treatment of private equity and hedge fund profits. Currently, fund managers’ earnings from investments are taxed at long-term capital gains rates - capped at 20% - rather than ordinary income rates, which can reach as high as 37%. Critics, including Trump, argue this creates an unfair advantage for financial industry elites, allowing them to pay significantly lower tax rates than average working Americans.

During his 2016 presidential campaign, Trump famously declared that “hedge fund guys are getting away with murder,” promising to close the loophole. However, despite his tax overhaul in 2017, the carried-interest provision remained largely intact, with only a minor adjustment: fund managers were required to hold investments for at least three years, rather than one, to qualify for the lower tax rate. Now, with a more aggressive stance, Trump’s renewed push could test how much congressional Republicans remain aligned with Wall Street’s interests.

The Private Equity Industry’s Response

Unsurprisingly, private equity leaders and hedge fund managers are pushing back, arguing that closing the carried-interest loophole would have unintended consequences, particularly for smaller investors and mid-market funds. Bobby Franklin, president of the National Venture Capital Association, has warned that raising the tax rate on carried interest would disproportionately harm smaller investment funds, particularly those outside of major financial hubs. “A change would disproportionately harm small investors, especially in Middle America,” Franklin stated.

The American Investment Council, private equity’s main lobbying group, has also called for maintaining the 2017 policy compromise, arguing that it struck the “right balance” by ensuring long-term investment while preserving incentives for capital deployment.

A Potential Threat to Private Equity’s Recovery

Beyond tax policy, Trump’s broader economic moves - including his aggressive stance on tariffs - could pose additional risks to private equity. Private equity firms, which typically hold investments for three to five years before exiting, have already faced prolonged hold times due to economic uncertainty. The COVID-19 pandemic, rising interest rates, and shifting market conditions have made exits more challenging in recent years.

The introduction of new tariffs on Chinese, Canadian, and Mexican goods—combined with potential delays in Federal Reserve interest rate cuts—could further complicate dealmaking. Karl Roberts, managing director at Portage Point Partners, highlighted these concerns: “Folks are a little concerned now that if inflation goes up because of tariffs, they might not see the interest rate reductions that they were anticipating for this year.” This combination of tax hikes and trade policy uncertainty could slow down private equity’s long-awaited rebound, particularly in sectors heavily reliant on global supply chains.

Will Congress Back Trump’s Plan?

While Trump’s stance on carried interest aligns with some progressive Democrats, the political path forward remains uncertain. The private equity industry has traditionally relied on strong bipartisan support to maintain its favorable tax treatment. In 2017, Trump’s attempt to eliminate the loophole was ultimately thwarted by Congress, where financial industry lobbyists wield significant influence. However, today’s Republican party has shifted, with many lawmakers adopting a more populist tone that could make them more receptive to ending what they see as a Wall Street tax break.

Democratic Senator Tammy Baldwin wasted no time in seizing the moment, posting on X (formerly Twitter): “Perfect timing. I introduced a bill today to end the carried interest loophole and make Wall Street investors pay their fair share. Glad you agree, @POTUS. Time to get this done.” This alignment of political interests—an unusual coalition of Trump-style populism and progressive economic policy—suggests that private equity may face a tougher fight than in previous years.

A High-Stakes Poker Game

Despite the bold rhetoric, some industry insiders believe Trump’s push against carried interest may be more of a negotiating tactic than a true legislative priority. Hooman Yazhari, a partner at Michelman & Robinson, cautioned that Trump’s moves on tariffs and tax policy are part of a broader strategy: “The fact that Mexico and Canada immediately came to the table and gave concessions shows that this is just a big poker game, and America knows what it’s doing. But every time you play a crazy hand in poker, the other sides think, what will this person do next?”

The real question is whether private equity leaders should brace for genuine reform or if this is another Trumpian power play designed to extract political leverage.

What’s Next for Private Equity?

For now, private equity firms and their investors must prepare for a period of heightened uncertainty. If Trump succeeds in eliminating carried interest tax breaks, it could lead to significant changes in fund structures, investment strategies, and compensation models across the industry. At the same time, Trump’s tariff policies and their impact on inflation and interest rates could determine whether private equity sees a smooth exit pipeline in 2025 - or remains stuck in an extended holding pattern. With political and economic forces colliding, private equity faces a defining moment. Whether Trump’s latest move is a strategic bluff or a genuine push for tax reform, one thing is clear: the game is far from over. Stay ahead of the curve, subscribe now for updates, and stay informed.