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Tax-Reform Must Include Carried Interest Capital Gains

by Thomas Aiello / /


National Taxpayers Union (NTU) strongly supports pro-growth tax reform for individuals and businesses to foster economic growth. However, it is important to understand the tradeoffs involved when reducing rates in one area and increasing taxes in another. If done in a careless manner, such actions could reduce net economic output and thwart the very aim of overhauling the tax system in the first place. Unfortunately, some Members of Congress have proposed eliminating what they brand a “tax loophole” on carried interest, even though it is taxed fairly at capital gains rates. Elimination of this longstanding provision that taxes carried interest as capital gains would be, in effect, a tax increase on business and investment -- which is why a letter this week from 22 House Republican lawmakers to the Chairman and Ranking Member of the Ways and Means Committee in support of current common-sense tax policy toward carried interest is such a welcome development.

Carried interest has been treated as capital gains for more than fifty years as a way to recognize the importance of long-term investment across the country. Entrepreneurs form partnerships with investors to combine capital held by pension funds, charities, colleges and endowments to make risky investments into innovative start-ups and construction. A tax increase on these parties will be passed on to middle class investors. Should there be a repeal of current carried interest treatment, the signatories of the letter note, it “would arbitrarily punish investors in real estate, venture capital, private equity and other partnerships by treating their gains differently from those of other investors.” This is no small matter. Led by Rep. Richard Hudson (R-NC), the group of lawmakers pointed out that some 3.6 million partnerships with 27 million partners were reported in the most recent tax filing season. “Many would be negatively impacted” by a turnabout on carried interest.

Additionally, taxing carried interest as ordinary income would result in lower capital liquidity, subdued economic growth, and diminished job creation. Reduced capital formation will stifle innovation and investment for small businesses and start-ups, which still have not expanded at the historical pace following a recession. A shift from a tax rate at capital gains to ordinary income can see firms’ tax rates increase by nearly 20 percentage points -- from 20 percent to 39 percent.

A prosperity-fostering tax reform package must include keeping carried interest at the capital gains tax rate. This provision is a core part of long-term investment partnerships, laying the foundation for an American economy of the future. NTU looks forward to supporting a tax reform package that will spur growth and investment in the economy for years to come.

If you have any questions, please contact NTU Policy and Government Affairs Associate Thomas Aiello at (703) 683-5700