Biden Budget Proposes End to Carried Interest, Higher Tax on Buybacks

President Joe Biden released his $6.8 trillion proposed budget for fiscal year 2024. The budget proposes several changes to tax policy to increase government revenue and reduce the federal deficit.

The budget proposal includes increasing the taxes companies pay on stock buybacks to 4%, from its current 1%. This aligns with a commitment Biden made during his State of the Union address on February 7. The tax is intended to encourage investment and to reduce the tax advantage of returning money to shareholders by way of stock buybacks rather than dividends, since buybacks are taxed as capital gains and dividends as income.

The proposal would also increase the corporate tax rate to 28% from its current 21% and move the top marginal personal income tax bracket up to 39.6% for people making more than $400,000 per year. Capital gains would also be taxed as wages for those making more than $1 million per year, meaning the plan proposes a marginal 39.6% capital gains tax for income over $400,000, up from the current 20% rate.

The proposal also commits to closing the carried interest loophole, which allows some asset managers to report compensation tied to an asset’s value as capital gains instead of as wages, which typically reduces the percentage of tax owed on that income.

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Biden also seeks to end the “like-kind exchange loophole” (based on Internal Revenue Code Section 1031), which permits real estate investors to defer paying capital gains taxes by investing the money from a sale into another real estate asset.

The federal budget expires on October 1 each year, though last year’s budget was twice extended into late December with continuing resolutions to prevent a shutdown. Biden’s budget would have to pass a House of Representatives with a narrow Republican majority and a Senate with an even narrower Democrat majority. As a result of the contentious relationship between political parties, large parts of Biden’s budget are unlikely to be considered.

The budget is often considered more of a political document than one that is expected to be adopted. In this case, Biden’s federal spending plan comes as House Speaker Kevin McCarthy, R-California, has threatened to block an increase in the federal debt limit, which is necessary to pay for federal spending Congress has already approved.

Tags: capital gains tax, carried interest, stock buyback, stock buybacks

The more gender diversity, the better investment teams perform. That’s the conclusion of a WTW research paper that found larger inclusion of female staffers boosted equity by 46 basis points and fixed income by 14 bps.

The study, which surveyed more than 400 asset management firms, indicated that the managers still have a way to go. Just 42% of them have any measurable objectives in their current diversity, equity and inclusion policy. Further, almost half, 49%, “have no targeted initiatives to attract more senior diverse talent,” the report stated.

While many believe that the larger companies are more adept at DEI initiatives, WTW’s research found “no meaningful relationship between organizational size and greater diversity across ownership or senior leadership.” Corporate size, it concluded, “does not always translate into increased overall diversity.”

Data on DEI is too slender at too many companies, the consultancy said. The study urged all employers “to expand data collection across other inherent and acquired traits of diversity, such as disability, sexual orientation, socioeconomic status and neurodiversity.”

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Since 2020, when WTW began publishing this survey, DEI improvement has occurred, yet not fast enough, the report declared. “There has undoubtedly been progress made on diversity by many asset managers in recent years, but the fact is that the pace of change at an industry level is still slow and disappointing,” remarked Chris Redmond, head of manager research at WTW, in a statement.

WTW has a program it developed to help employers boost their DEI. “Alongside seeking diverse teams, we need to engage with the whole industry, pushing some of the largest and longest standing asset managers to improve their DEI,” the report noted. Mentorship, training and sponsorship to underrepresented groups are vital to achieve these ends, it said. Measuring gender and ethnicity pay gaps are part of that, in WTW’s eyes.

Perhaps once asset managers realize that better diversity brings better returns, more will turn to DEI, the study contended. Said Redmond, “We are hopeful that the truly extraordinary investment performance benefits linked to superior diversity can serve as a catalyst for acceleration.”