Will Senate Stay Strong Against Taxing Carried Interest?

Andrew Quinlan, writing in Town Hall, explains why taxing “carried interest” will harm the economy:

Historically, capital investment has been taxed at a lower rate than wage income. There is good reason for this. Savings and investment are already double and even triple taxed compared to consumption even though they are key to economic growth. Lower rates on capital gains are an attempt to offset, albeit only partially, the tax code’s destructive bias against saving.

That is ultimately what the seemingly never-ending debate on “carried interest” is all about. The carried interest is the share that general partners receive as compensation for profits made on investments. In other words, managers of private equity, venture capital, or real estate partnerships, among others, are rewarded a percentage (usually 20%) of net profits beyond a decided point (also known as the hurdle rate).

The goal is to incentivize managers to maximize an investments’ return, which benefits both investors—including not just individuals, but also things like pensions and endowments—and the broader economy. After all, achieving the highest possible return on an investment indicates that funds have been allocated to where they provide the strongest economic benefit.

Carried interest is taxed as a long-term capital gain (currently, for assets held for over one year) only when it qualifies as such. There is no loophole. When general partners receive a flat fee regardless of the profits generated, it is appropriately taxed as ordinary income.

Democrats have long waited to raise capital gains taxes as part of their effort to increase the overall level of taxation and size of government. Their long-standing call to equalize capital gains rates with ordinary wage income, while devoid of economic logic, is a means to that end.

Some populists on the right have unfortunately aided in this effort by portraying the tax treatment of carried interest as a special benefit for hedge funds, as Donald Trump argued during the campaign. This is a red herring. Hedge fund managers rarely receive the lower capital gains rate on carried interest because they do not typically hold stakes for long enough to qualify.

Nevertheless, House Ways and Means Chairman Kevin Brady seeks to amend the tax plan by extending the holding period from one to three years, thus eliminating even those rare cases where a hedge fund manager had a carried interest taxed at the lower rate. This compromise defangs the populist argument while preserving the capital gains rate for other partnerships that would actually take the brunt of a tax hike on carried interest, such as real estate, which makes up 46% of those who would be affected by treating carried interest as ordinary income, and private equity firms.

Read the whole thing here.

Campaign for Liberty opposes all attempts to raise carried interest tax. Unfortunately we have heard there will be a push in the Senate to include carried interest in the tax reform bill. Campaign for Liberty supporters should call Senate Majority Leader Mitch McConnell at 202-224-2521 and urge him to oppose any effort to raise taxes on carried interest.

For more information on this issue, see the coalition letter co-signed by Campaign for Liberty:

March 9th, 2017
The Honorable Paul D. Ryan Speaker of the House
U.S. House of Representatives H-232, The Capitol Washington, D.C. 20515

The Honorable Kevin Brady
Chairman, Committee on Ways and Means U.S. House of Representatives
1102 Longworth House Office Building Washington, D.C. 20515

Dear Speaker Ryan & Chairman Brady:

On behalf of the undersigned organizations, we write in support of your efforts to pass pro-growth tax reform and urge you to oppose efforts to increase taxes on capital gains.

The next four years represents an opportunity to reduce -- not increase taxes on capital gains. Over the past eight years, the top rate increased from 15 percent to 23.8 percent, and the top integrated
rate currently sits at 56.3 percent compared to the OECD/BRIC average of 40.3 percent.

While it appears unlikely that incoming lawmakers and the administration will increase rates outright, they should also be sure not to incrementally move the needle toward higher capital gains taxes in other ways, like boosting taxes on carried interest capital gains.

Carried interest capital gains income is earned through a net gain within a partnership formed between individuals with capital and an expert investor. They are indistinguishable from any other type of capital and so they are paid at the same capital gains tax rates.

While supporters of higher taxes on carried interest capital gains say it takes aim at 'hedge fund guys,' it would also hurt pension funds, charities, and colleges that depend on these investment partnerships as part of their savings goals. In addition, small businesses, innovators, and inventors would find themselves increasingly shut out from investment money available to them from these partnerships.

Rather than supporting proposals that lead to higher capital gains tax rates, the incoming Congress and administration should look toward lower rates. One model to follow is contained in the House GOP blueprint, which reduces the top rate on capital gains to 16.5 percent.

Today, pro-growth tax reform is needed more than ever. It is imperative that lawmakers prioritize an overhaul of the tax code as well as protect the areas of the current tax code that promote innovation, investment, and growth.

Sincerely,

Grover Norquist
President, Americans for Tax Reform
Pete Sepp
President, National Taxpayers Union and Foundation
Jim Martin
Chairman, 60 Plus Association
Norm Singleton
Vice President for Policy, Campaign for Liberty
James Edwards
Co-Director, Inventors Project
Charles Sauer
President, Market Institute
Larry Ward
Chairman, Constitutional Rights PAC
Shaun McCutcheon
Chairman, Conservative Action Fund
Derrick Hollie
President, Reaching America
Phil Kerpen
President, American Commitment
Dick Patten
President, American Business Defense Council
Adam Brandon
President and CEO, Freedomworks
Jeffrey Mazzella
President, Center for Individual Freedom
Colonel Rob Maness Chairman, Gator PAC
Donny Ferguson
Chairman, BetterEconomy.org
George Landrith
President, Frontiers of Freedom
Andrew Langer
President, The Institute for Liberty
Judson Phillips
Founder, Tea Party Nation
Paul Morinville Chairman, US Inventors
Andrew F. Quinlan
President, Center for Freedom and Prosperity
Louis Foreman President, Edison Nation
Richard A. Viguerie Chairman, Conservative HQ
Adrian Pelkus
President, San Diego Inventors Forum
Randy Landreneau
Founder, Independent Inventors of America
Iain Murray
Vice President, Competitive Enterprise Institute
Dee Hodges, President Maryland Taxpayers Association
David Williams
President, Taxpayers Protection Alliance
Melissa Ortiz
Founder and Principal, Able Americans
Dan Weber
CEO, Association of Mature American Citizens
Mario Lopez
President, Hispanic Leadership Fund
Gregory T. Angelo
President, Log Cabin Republicans
Willes K. Lee
President, National Federation of Republican Assemblies

Tags: tax reform