Key Takeaways
- • The GOP's tax reform plan limits corporate interest deductibility to 30 percent of EBITDA for most companies, a provision that directly threatens private equity's debt-dependent business model, where leverage functions as a core operational tool.
- • Steve Schwarzman's close relationship with President Trump—including chairing the strategic policy forum and securing Blackstone into a $40 billion Saudi infrastructure investment fund—now faces pressure as the tax plan fails to protect the industry's critical interest deduction benefit.
- • While carried interest treatment (the "hedge fund loophole") survives in the GOP proposal, the interest deductibility restrictions effectively neutralize much of the private equity sector's anticipated tax benefit, creating a "winning run home by taking a nut shot" outcome.
- • Industry stakeholders have mobilized through the BUILD Coalition to actively oppose the interest deductibility limitation, signaling coordinated resistance from major corporations and financial firms.
Summary
Steve Schwarzman's carefully cultivated access to the Trump administration faces a critical test following the GOP's release of its long-awaited tax reform plan on November 2, 2017. As Blackstone's chairman and CEO, Schwarzman has positioned himself as one of the most influential business voices in Trump's orbit—chairing the president's strategic policy forum and successfully maneuvering Blackstone into a Trump-sponsored $40 billion Saudi infrastructure investment fund. However, the tax proposal threatens to undermine the very interests Schwarzman and his peers sought to protect.
The core issue centers on a provision that restricts corporate interest deductibility to 30 percent of EBITDA for most companies, with an exemption only for small businesses. This limitation directly targets the private equity industry, where leverage is foundational to the business model and operational strategy. Unlike other corporate sectors that can absorb interest deduction caps more readily, private equity firms rely on debt financing the way mammalian organisms rely on oxygen—it is integral to how they function and generate returns.
While the GOP proposal preserves carried interest tax treatment (commonly referred to as the "hedge fund loophole"), this protection offers limited consolation given the interest deductibility restrictions. The overall corporate rate cut provides some offset, but industry observers characterize the tradeoff as fundamentally inadequate. As one analysis notes, it amounts to "getting the winning run home by taking a nut shot with the bases loaded."
The affected industries have not remained passive. Businesses have formed the BUILD Coalition to actively oppose the interest deductibility provision, indicating coordinated, aggressive resistance from major corporations and institutional investors. For Schwarzman specifically, the situation creates potential reputational and professional complications: his prominent role in advising Trump, combined with accusations that he prioritizes Blackstone's interests over broader industry advocacy, may soon result in "concerned calls from his own peers" seeking clarification on his ability to influence the administration on their behalf.
The core issue centers on a provision that restricts corporate interest deductibility to 30 percent of EBITDA for most companies, with an exemption only for small businesses. This limitation directly targets the private equity industry, where leverage is foundational to the business model and operational strategy. Unlike other corporate sectors that can absorb interest deduction caps more readily, private equity firms rely on debt financing the way mammalian organisms rely on oxygen—it is integral to how they function and generate returns.
While the GOP proposal preserves carried interest tax treatment (commonly referred to as the "hedge fund loophole"), this protection offers limited consolation given the interest deductibility restrictions. The overall corporate rate cut provides some offset, but industry observers characterize the tradeoff as fundamentally inadequate. As one analysis notes, it amounts to "getting the winning run home by taking a nut shot with the bases loaded."
The affected industries have not remained passive. Businesses have formed the BUILD Coalition to actively oppose the interest deductibility provision, indicating coordinated, aggressive resistance from major corporations and institutional investors. For Schwarzman specifically, the situation creates potential reputational and professional complications: his prominent role in advising Trump, combined with accusations that he prioritizes Blackstone's interests over broader industry advocacy, may soon result in "concerned calls from his own peers" seeking clarification on his ability to influence the administration on their behalf.
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