Hiking the tax on carried interest capital gains is a lose, lose, lose
Progressive Democrats are doubling down on efforts to raise taxes on a type of capital gain known as carried interest. Hiking the tax rate on this type of capital gain would have devastating effects on investment in U.S. businesses, the job market and the overall economy.
The proposed legislation, re-introduced last month by Sen. Tammy Baldwin, D-Wis., and Rep. Bill Pascrell, D-N.J., would raise the capital gain tax from its current rate of 23.8 percent to 37 percent, the same as the personal income rate. There is a compelling reason, however, that the tax code distinguishes between regular income and capital gains and overlooking that rationale will hurt investment and economic growth.
Carried interest capital gains income are the profits from a long-term partnership formed between individuals with capital and an expert investor. They are indistinguishable from any other type of capital gains and are appropriately taxed as capital gains. Republicans and moderate Democrats in the House and—if the bill makes it that far—Senate should reject this legislation without hesitation.
Risk and reward
Those who form these long-term partnerships, typically private-equity funds, often purchase struggling businesses, turn them around and sell them at a profit. Other private equity funds provide the investment and expertise to grow an existing small business. There is a considerable risk in these types of long-term investments but—when successful—they benefit the entrepreneurial stakeholders, job seekers and consumers alike. Everyone wins when businesses thrive.
The upside of more productivity also means the managers of these revitalized businesses can create more jobs for those in their community. It’s something like chef Gordon Ramsay swooping in to help a mom-and-pop restauranteur to operate a business in the modern marketplace.
Private equity grew the popular New England coffee shop chain Dunkin’ Donuts into a worldwide brand with more than 12,500 locations. Hilton Hotels once lacked the panache of its rivals. Today, with the expertise and investment of private equity, the company has doubled the number of hotel rooms.
Hiking the tax on carried interest capital gains would discourage entrepreneurs who invest their time, energy and expertise in businesses like these—and America would be worse off because of it.
Drew Maloney, president and CEO of the American Investment Council, points out that the bill “would unnecessarily harm entrepreneurs, business owners, endowments, pension funds, and American workers in every state and congressional district in the country.”
The proposal hits right at the heart of American ingenuity and the mechanism by which fledgling or obsolete businesses are made better for the benefit of all Americans. Increasing the tax rate on this riskier type of investment income would be a disastrous move for our economy, which—although improved over previous years—doesn’t need a wrench thrown in its gears. Americans deserve better.
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The people need a real robust run of prosperity. Increasing the tax rate on any type of capital gains – including this one – would short circuit the economy. The legislation, if passed, would bring us closer to a nightmarish return of the Great Recession.
Members of the House and Senate must stop such a leap forward to socialism and vote against this new burden on prosperity producing capital gains.
Steve Forbes is chairman and editor-in-chief of Forbes Media and is host of the new podcast “SteveForbes: What’s Ahead.”