Trump’s Budget May Give Private Equity a Giant Tax Break
Lawmakers have inserted a line into Donald Trump’s new budget bill that would reward Wall Street firms with billions of dollars in new tax breaks when they load up companies with debt and proceed with pay cuts, factory closures, and layoffs.
President Donald Trump delivers remarks before signing a series of bills related to California’s vehicle emissions standards during an event in the East Room of the White House on June 12, 2025, in Washington, DC. (Chip Somodevilla / Getty Images)
Congressional lawmakers have inserted a line into President Donald Trump’s new tax bill that would reward Wall Street firms with billions of dollars of new tax breaks when they load up companies with debt and proceed with worker pay cuts, factory closures, and mass layoffs, according to bill text reviewed by the Lever.
The new bipartisan provision is the culmination of a multimillion-dollar lobbying campaign by private equity giants, whose executives have been among the biggest supporters of Trump and the lawmakers behind the legislation.
The provision, which uses the tax code to effectively subsidize Wall Street firms’ takeovers of small- and medium-sized businesses, follows a landmark study demonstrating that employment quickly shrinks at companies when they are purchased by private equity firms. It also follows new data showing a record number of private equity–owned companies are being driven into bankruptcy.
The arcane provision buried in Trump’s One Big Beautiful Bill Act moving through Congress would raise the business tax deduction that private equity–owned companies can claim on interest payments they make to pay back loans.
Private equity firms primarily benefit from this deduction because they typically borrow money to acquire businesses, then load those companies up with more debt as they strip down the companies, often leading them into bankruptcy. Indeed, insurmountable levels of debt were at issue in recent corporate collapses like Toys “R” Us, Red Lobster, and Forever 21, as well as essential hospital networks and hundreds of small businesses.
Lawmakers have not broadcast the implications of the new language. The bill text summary released last week euphemistically says only that “this provision increases the cap on the deductibility of business interest expense.”
The move is clearly timed to bail out private equity firms at a time when they’re hungry for government support amid high interest rates, according to Eileen Appelbaum, codirector of the Center for Economic and Policy Research and author of Private Equity at Work: When Wall Street Manages Main Street.
“Private equity sees this as a moment to increase the deduction for the interest they pay on the debt they pile onto the companies they own,” wrote Appelbaum. “They want to pull a fast one and slip this by a public not well-versed in business accounting principles.”
When private equity companies load up their portfolio companies with debt, the larger interest deductions under the proposed tax language could flow back to them in the form of higher returns, as the international law firm Troutman Pepper Locke touted in its legal analysis of the tax bill provision. Through special tax-sharing agreements, private equity owners will sometimes even collect the tax write-off from their debt-ridden portfolio companies and transfer it onto their own books.
Current tax law caps interest deductions at 30 percent of business income, which remains the same in the Senate reconciliation package. But an accounting maneuver included in the bill creates more lenient standards for calculating the deduction as a share of total taxable income, which could boost private equity firms’ tax savings by an estimated 15 percent, netting the companies billions of dollars.
This adjusted income calculation will lead to $200 billion in lost government revenues over the next ten years, according to the Committee for a Responsible Federal Budget.
Lobbying for a Stealth Bailout
This modification of the tax code, supported by both Congressional Republicans and Democrats, has been a top priority of the American Investment Council, the main lobbying group on behalf of private equity giants. Private equity interests are collectively among the top campaign contributors to Sen. Mike Crapo (R-ID) and Rep. Jason Smith (R-MO), the Senate and House committee chairmen overseeing the drafting of the legislation.
Private equity lobbyists have attempted to spin this deduction as a boon for Main Street, helping to boost investment in American manufacturing and small businesses. But most businesses typically try to avoid massive borrowing costs, while private equity thrives on it.
The American Investment Council has spent more than $10 million in the past five years pushing for this policy as well as another carve-out in the bill protecting the carried interest loophole, which allows investment managers to avoid paying millions in taxes on their personal income each year.
The interest deduction provision, however, is even more integral to the operation of the financial sector’s debt-financing model. Expanding its scope is a huge gift to Wall Street because it comes at a time when private equity growth has dropped dramatically due to higher costs of borrowing under the Federal Reserve’s interest rates, among other market conditions.
In the first quarter of this year, private equity fundraising totals were down by 135 percent compared to this time last year, according to a report from industry publication PitchBook. It’s become harder to raise capital from investors because the returns from the industry have slumped.
One factor is that private equity managers have struggled to sell off their companies to new buyers and recoup their initial investment. Holding onto those companies for longer periods drives down the sale price. Debt payments are larger now, too, because of interest rates.
Under these dour circumstances, Wall Street turned to Congress to give the sector a lift.
What’s Old Is New Again
The new rules for interest deduction are reverting back to a more laissez-faire tax code that fueled the heyday of “leveraged buyouts” in the 1980s.
Those financial maneuvers typically involve a private equity firm putting down a small amount of their own money and then borrowing the rest, using the assets of the company it’s acquiring as collateral. The acquired company is then typically on the hook for paying off the debt heaped onto its books to finance its own purchase.
For example, Toys “R” Us’s bankruptcy in 2015 was in large part the result of a 2005 leveraged buyout by a collection of private equity investors led by KKR and Bain Capital, piling $6 billion in debt onto the toy store chain. Toys “R” Us ended up paying up to $500 million a year just in interest payments to service the debt.
After acquiring its target, private equity managers then juice returns for their executives and investors. That often entails selling off more valuable parts of a company, such as real estate, slashing labor costs, and degrading the quality of service for consumers, in order to make the firm leaner and thus more profitable.
Another financial engineering trick by private equity owners is forcing businesses to take on even more debt by borrowing money to make lavish dividend payouts to their investors in what’s known as dividend recapitalizations. Dividend recapitalizations have exploded in recent years and have been extracted by private equity everywhere from shopping conglomerates to cash-strapped hospitals.
So far this year, 70 percent of corporate bankruptcies have been linked to private equity control.
The havoc wreaked on Main Street by financial firms is directly encouraged by the tax code. Interest payments on the borrowed money can be deducted, boosting the portfolio companies’ tax savings, which directly increase returns for private equity owners.
Under the old tax rules, Wall Street investors were afforded a “more generous standard” of deduction, according to Steven Rosenthal, a tax policy expert who worked as a legislative counsel to the Congressional Joint Committee on Taxation. That standard — known as EBITDA — allows businesses to spread their costs on the books for capital-intensive investments such as equipment, and factor in their more valuable assets such as patents or intellectual property.
But in 2017, the Trump Tax Cuts and Jobs Act adjusted this accounting standard in order to claw back some revenues to fund other massive tax breaks for the wealthy. It set a 30 percent cap on interest deduction and imposed a stricter accounting method, EBIT, which is just straightforward operating income not including the fluctuating value of other assets.
The discrepancy between the old rules and the current rules can be enormous, costing larger corporations millions of dollars in tax savings. In Toys “R” Us’ case, the old rules would have saved the company’s private equity owners an additional $90 million in taxes.
On average for most businesses, 85 percent of their debt payments were totally tax-deductible under the old rules. But after the new rules took effect in 2022, they could only write off about 75 percent.
In the years leading up to the phase-in of those new rules, private equity lobbied Congress aggressively to kill the stricter limit and return to the old rules.
In 2021, a bipartisan group of lawmakers introduced legislation called the “Permanently Preserving America’s Investment in Manufacturing Act,” which proposed an extension of the new interest deduction. The bill’s cosponsors included several Democrats such as former Arizona senator Kyrsten Sinema (I), who was a top recipient of campaign contributions from the private equity industry, totaling over $1 million just in her final year in office. She was joined on the bill by Republican senators James Lankford (OK) and Jerry Moran (KS), also major beneficiaries of private equity cash.
Those bills didn’t pass, but identical language has now been included in the Senate’s reconciliation bill following the lead of the House’s version.