By Alan Rappeport, Thomas Kaplan and Jim Tankersley
WASHINGTON – Republicans outlined significant changes on Monday to the sweeping tax bill unveiled by House lawmakers last week, moving to tighten restrictions on so-called carried interest, alter rules aimed at preventing U.S. companies from stashing profits offshore and further restrict a tax credit claimed primarily by low- and middle-income individuals.
The changes came as part of an amendment to the bill, submitted by Rep. Kevin Brady of Texas, the Republican chairman of the Ways and Means Committee, as the House panel began to officially debate the bill.
Among the most significant changes is a provision that would aim to close the so-called carried interest loophole, which has been a source of ire among Democrats and some Republicans, who argue it is an unwarranted tax break for the wealthiest Americans. A substantial portion of the compensation of hedge fund and private equity executives is derived from the investment gains that their funds generate.
Under the current tax code, that compensation is treated as capital gains, meaning it is taxed at a rate of 23.8 percent, well below the 39.6 percent income-tax rate that now applies to the top tier of individual earners.
Brady’s amendment would require investors such as hedge fund managers and real estate developers to hold on to assets for a period of three years to qualify for the lower capital gains rate on their income. The move would essentially seek to weed out those who use the loophole to avoid paying ordinary income tax rates on their earnings.
Brady, speaking on CNBC, said the effort was intended to “make sure it really is focused on those long-term, traditional real estate partnerships.”
Carried interest has been the subject of intense political debate and critics of the plan complained that it was not addressed in the original bill. President Trump said repeatedly on the campaign trail that hedge fund managers should not use the loophole to pay lower taxes than middle-class Americans working jobs with salaries.
Other changes to the bill included tweaks to the treatment of the earned-income tax credit, which is primarily used by lower- and middle-income workers. Eligibility for the earned-income credit depends on income and family size. About 26 million people received the credit last year, and the average credit was more than $2,400, according to the Internal Revenue Service.
Brady said the change was intended to “protect the integrity” of the tax credit by reducing improper claims. The amendment would require employers to provide more payroll information about their employees and give the Internal Revenue Service more power to verify the pay that workers report.
The amendment also would exempt more universities from an excise tax on their investment income. The original plan included a 1.4 percent tax on the investment income of private colleges and universities with at least 500 students and assets of $100,000 or more per full-time student. The new plan would apply to schools with assets worth at least $250,000 per student, which would affect Ivy League universities and other private colleges.
The changes to the House tax legislation came as Senate Republicans were expected to release their own bill on Thursday. With a narrow majority in that chamber, Republicans may struggle to pass a bill without any support from Democrats. In an effort to galvanize some support across the aisle, the White House has dispatched Marc Short, director of legislative affairs, and Gary D. Cohn, director of the National Economic Council, to meet with top Senate Democrats on Tuesday to discuss the tax plan.
The amendment does not mention the repeal of the Affordable Care Act’s individual mandate, which Republicans have been considering as a way of raising additional revenue while tackling a provision of the health law that they opposed. Brady did say, however, that changes such as repealing the medical device tax, which many Republicans have called for, would not happen as part of this legislation.
“We will move to these important health policies separately and immediately after conclusion of our tax reform efforts,” Brady said.
After a day of statements from Republicans and Democrats about the merits and problems with the bill, the amendment rankled some members of the minority party.
“You make a mockery out of this committee,” Rep. Sander M. Levin, D-Mich., said to Brady.