Margaret Thatcher reminded us that one of the problems with socialism is you “eventually run out of other people’s money,” but that doesn’t stop liberals like Senate Minority Leader Chuck Schumer (D-NY) from finding more sources. His latest crusade is an effort to increase taxes on investment income – namely carried interest capital gains.
For several years Schumer opposed increasing capital gains on carried interest, but now, after declaring he will work with President Trump when he “abandons” his party, is hoping to raise taxes. He cited an increase in taxes, particularly on carried interest, as an area where he is willing to work with the president.
What is carried interest? Carried interest is the share of an investment partnership allocated to the investor. These partnerships occur when individuals with capital and individuals with expertise pool their resources together. Is there a difference between investment income earned by these partnerships or other type of investment income? Absolutely not. Yet for the class warfare types in Washington, carried interest has become a red flag they waive in the effort to raise taxes because fund managers are often compensated in this manner.
In a joint letter from two of Washington’s top taxpayer advocacy groups, Grover Norquist, Founder and President of Americans for Tax Reform (ATR) and Pete Sepp, President ofNational Taxpayers Union (NTU) urged President Trump and Congress to work to reduce, not increase, the tax burden placed on all forms of 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 ratecurrently 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 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.”
For over 100 years, carried interest has been treated as capital gains and since it does not distort or deviate from normal tax rules and principles, it cannot rightfully be considered a loophole. If carried interest is earned when an investor sells a capital asset for a profit and after holding it for more than one year— it is, by definition, a capital gain and should be taxed as such. Raising capital gains taxes will hurt all Americans, not just the “rich guys.”
President Trump and Congress have set a goal of massive tax reform that will benefit Americans and help businesses create new jobs and innovations. Any tax increase that specifically targets private equity, venture capital, real estate and other long-term business investments is counterproductive to reaching that goal. The best way to lower budget deficits is to lower taxes, which will free up the money that our economy needs to help make America great again.