One of the more reliable arguments coming from liberals looking to score easy points over the years is the perennial call to do away with the capital gains tax designation for carried interest.
Bernie Sanders called carried interest capital gains ‘egregious.’ Al Franken said the tax policy was ‘unfair.’ Elizabeth Warren said the carried interest capital gains treatment was evidence the tax code is ‘rigged.’
Are they correct? Of course not. Carried interest is a standard business practice that is likely as old as business itself. It represents the portion of profits on capital investment shared with the person who managed the investment. Carried interest is predicated on the simple concept that while capital investors invest money, investment managers invest time and expertise. Under the existing tax code, time really is money, as investors pay taxes on carried interest at the same rate as other investors pay taxes on capital gains.
Left-wing politicians have trumpeted carried interest capital gains as a massive loophole that hinders our economy and gives billionaires a free pass. In reality, raising taxes on carried interest to liberals’ desired level would fill a gap that represents less than 0.04 percent of federal spending while discouraging $600 billion of investment in American businesses and infrastructure a year.
Raising taxes on carried interest capital gains would have a chilling effect on an important economic driver that leads to growth and job creation. Carried interest capital gains typically apply to industries like private venture capital, and real estate investment. The tax treatment is an incentive for general partners to maximize capital investments and get the best possible return. Removing that incentive, and stifling those industries, would halt badly needed positive economic movement – and would likely sink important policy initiatives like a bipartisan infrastructure plan, which is likely to be funded with private equity funds through public-private partnerships.
Up to this point, leaders in both chambers of Congress have resisted any temptation to raise taxes by taxing carried interest at a higher rate than capital gains. This is no small accomplishment, especially since then-candidate Trump pledged on the campaign trail to side with Democrats on carried interest and target this important tool for an unnecessary and costly tax hike.
House Ways and Means Committee Chairman Kevin Brady and Senate Finance Chairman Orrin Hatch tightened the requirement for how long hedge fund managers must hold a stake in an investment in order to qualify for carried interest capital gains. This move keeps the economic incentives in place while tamping down the president’s criticisms – right or wrong – that hedge fund managers are ‘getting away with murder.’
The House of Representatives’ tax bill has already passed, and the Senate bill is expected to soon follow. But this process is far from over – and we can be sure that lawmakers who would prefer government growth over economic growth will be howling for a tax hike on people who make wise investments, drive hiring and job creation, and help jumpstart economic growth. Congress must hold strong and preserve capital gains treatment for carried interest.