Taxpayers Protection Alliance's Report on Carried Interest
What Industry Leaders Are Saying
The proposal may also make it harder for incoming partners at venture capital and private equity firms to receive carried interest in the firm’s preexisting funds. This would discourage diverse partners from joining venture capital and private equity firms, the exact opposite of what is needed.
The economy just shrank for the 2nd quarter in a row – Washington should not move forward with a new tax on private capital that supports small businesses, jobs, and pensions across America.
As entrepreneurs of color, we believe this proposal will make it harder for us to continue to grow our businesses, support jobs in our communities, and achieve wealth for our families and employees.
Current law recognizes the importance of long-term investment, but this proposal would punish entrepreneurs in investment partnerships by not affording them the benefit of long-term capital gains treatment.
The proposal may also make it harder for incoming partners at venture capital and private equity firms to receive carried interest in the firm’s preexisting funds. This would discourage diverse partners from joining venture capital and private equity firms, the exact opposite of what is needed.
What is surprising is that, at a time when we as a nation are seeking to accelerate economic growth and access to opportunity, a tax increase this targeted on the most productive investment financing model in the U.S. economy is under such significant consideration.
These sweeping changes, if enacted, would discourage individuals from pursuing their entrepreneurial vision, tax the sweat equity that makes real estate more productive and useful, and slow economic growth. The results would be particularly harmful to industries that seek to build a business or asset with lasting value over an extended time horizon.
What Policy Experts are Saying
The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness today released a reportdetailing how a proposed 98% tax increase on carried interest capital gains would reduce investment, lead to widespread job losses, and decrease tax revenues at the local, state, and federal levels.
“The carried interest tax is a direct attack on the structure of partnerships that are used by innovative businesses—from small firms to venture capital and angel investors — that take risks and make an outsized contribution to economic growth and job creation … Ironically, by stifling innovative partnerships, Biden’s carried interest tax hike would also cut the lifeline of some of the very types of businesses he champions. Folks peddling “green energy,” for instance, are getting tons of funding from private equity, venture capital, and angel investors. So are many worthy traditional companies, such as health care firms.”
The Schumer-Manchin tax bill’s description of this provision as “closing the carried interest loophole,” is no more than a wolf in sheep’s clothing. Taxing private funds at a time when the economy is contracting will only contribute to more job losses, poor pension fund returns, and disincentivize investment.
“Their plan would also penalize American entrepreneurialism by hiking taxes on capital gains and carried interest, which fuel risk-taking and innovation.”
The tax increase on carried interest also eliminates about 5,000 jobs.
Haphazardly imposed new taxes on carried interest from critical investments is a bad idea that will harm the economy without raising much revenue. New ways to raise taxes on investment income always come at the expense of all of us. Especially in a time of economic crisis, American workers rely on the support of continued investment for a future that will bring with it higher wages and greater economic opportunity.
“As the American economy continues to get back on its feet, lawmakers should resist disincentivizing long-term investments in small businesses and startups. Growing businesses rely on startup capital, and these investments result in increased innovation and job creation. However, taxing carried interest as labor income would reduce capital liquidity and stifle economic growth.”
Increasing taxes on carried interest means many entrepreneurial firms and small businesses across sectors will not have access to the capital they need to compete, scale, innovate, and navigate challenging economic conditions. This will only hurt local economies and workers, and more broadly undermine U.S. competitiveness.
Treating carried interest as ordinary income rather than capital gains (which has been the tax treatment for 100 years) would generate less than $14 billion over 10 years. Carried interest is not the same as regular income because it is an ownership stake in a business, and the interest income is returned if certain profits are not achieved. The small amount of money that would be added to the Treasury is more than offset by the negative impact this change in the tax laws would have on private investment. The 2017 Tax Cuts and Jobs Act raised the long-term capital gains holding period for carried interest to three years, and this should not be changed.
