How Jeb Bush and Donald Trump Could Cost Carlyle Group Half a Billion Dollars

Carlyle Group founder David Rubenstein has called the taxation of “carried interest”–the hedge-fund fees that make up much of Washington’s best known billionaire’s income–“a bumper sticker issue,” one that sounds good on the campaign stump but won’t dent the national debt. But the sticker has been spotted on more bumpers of late, with Republican candidates Donald Trump and Jeb Bush both pledging in recent days that they’d end a key exception on how the US taxes carried interest.

Rubenstein. Photograph by Jeff Elkins.

If Trump or Bush get their way, how much would Rubenstein and his partners stand to lose? With Election Day still a year and more away, and their proposals–especially Trump’s–still vague, there’s no way to say precisely. But even a moderate change in the way hedge-funders’ income is taxed could cost Carlyle as much as half a billion dollars.

Here’s how it works: Carlyle, like Mitt Romney‘s Bain Capital or New York giant Blackstone, charges investors in their hedge funds for managing their portfolios in two ways: it takes a 2 percent cut of the entire amount the client has invested, then takes 20 percent of what the investments earn in a given year. That 20 percent charge is known as carried interest, and it’s taxed at the capital gains rate of 20 percent, as if Carlyle itself had won it in the market instead of treating it as a fee for services rendered. This exception is exclusive to hedge-funds; investment banks like Goldman Sachs pay normal income-tax rates on their management fees.

In 2014, Carlyle netted $1.75 billion in investment fees, according to the company’s filings to the SEC. It’s safe to assume that at least three-quarters of that take was carried interest, or about $1.3 billion, on which Carlyle’s partners would pay some $260 million in tax. If that same $1.3 billion were taxed at the top personal income tax rate of 39.6 percent, the partners would have paid more than $514 million, or about $252 million more in a single year.

“It wouldn’t likely affect their business,” says Victor Fleischer, a University of San Diego economist who has often written on the topic. “They are built on a platform of managing people’s money, and that won’t change.” Rubenstein, in other words, would have little choice but to suck up the tax hit.

Fleischer, who has advocated raising rates on carried interest within policy circles and in New York Times economics columns, notes that Rubenstein is right that ridding the tax code of the carried interest exception won’t do much to erase the country’s budget deficits. “It’s a fairness issue,” he says, pointing out that the current tax treatment on carried interest is a break “mostly for the one percent of the One Percent.”

President Obama, who has been inveighing against the carried interest exception since he first ran in 2008, agrees, as do Hillary Clinton and other populist, financially minded Democrats like Elizabeth Warren.

Republicans Trump and Bush would soften the blow of a carried interest tax hike. Both candidates have said they’d like to lower tax rates overall. Bush’s plan, released Wednesday, would reduce the top rate to 28 percent, requiring Carlyle to pay only $105 million more in taxes last year.

Even to someone personally worth nearly $3 billion, that’s still a pretty costly bumper sticker.