US private equity and hedge fund managers are increasingly concerned about a two-pronged threat by the Republican and Democratic presidential frontrunners to scrap a tax break worth billions of dollars to Wall Street.

The unusual consensus between Donald Trump and Hillary Clinton has hardened as the populist tone of the 2016 election campaign leaves US business fretting that its interests are being ignored by candidates.

The bashing of investment partnerships using the tax break on ‘carried interest’ profits highlights candidates’ desire to woo voters struggling in an economy that some feel is rigged in favour of the wealthy.

On January 13, Tom Donohue of the US Chamber of Commerce, corporate America’s top lobbyist, voiced his dismay. “I used to call the lead-up to the big national election ‘silly season’, but given some of the rhetoric and proposals that we’re hearing from both parties, it’s not silly; it’s damn serious, and sometimes a little scary.”

Less than three weeks before voting begins, Mrs Clinton this week reaffirmed her determination to scrap the preferential tax treatment that critics call a loophole. A few days earlier Mr Trump said: “Wall Street has caused tremendous problems for us. We’re going to tax Wall Street.”

Jeb Bush, once the favourite of Republican business people, and Bernie Sanders, who is mounting a leftwing challenge to Mrs Clinton, also want to scrap the tax break.

The treatment of carried interest lets managers of private equity, venture capital and hedge funds pay a lower rate than most people, because the cut they take on some investment gains — a key part of their remuneration — is taxed at a lower level than a regular salary.

While the top rate of income tax stands at 39.6pc, money managers’ portion of profits on assets held for at least a year is taxed at 20pc as a ‘long-term capital gain’.

That gap has led Mrs Clinton to lament that they “pay a lower rate than teachers or nurses”. Mr Trump, despite professing to have hedge fund manager friends, has said: “A lot of them — they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous.”

Senator Tammy Baldwin of Wisconsin, a Democrat and Clinton supporter who has introduced legislation to tax money managers’ earnings as ordinary income, told the Financial Times there was no justification for their preferential tax treatment.

Ms Baldwin’s bill would add $15bn to the collective tax bills of current carried interest beneficiaries over ten years, according to the Joint Committee on Taxation. Victor Fleischer, law professor at the University of San Diego, calculates it could cost them $180bn.

Mr Trump’s tax plan specifically targets ‘speculative partnerships that do not grow businesses’, a sign that parts of private equity could be exempted, said one industry official. Hedge funds say they do not pay capital gains tax on the bulk of their earnings because profits from short-term trading are already taxed as ordinary income.

Overall, Mr Trump would lower taxes for the wealthy by slashing the top rate of income tax to 25pc.

Published in Dawn, Business & Finance weekly, January 18th, 2016