Sen. Elizabeth Warren (D-Mass.), and a cabal of Democrats, introduced partisan legislation to empower the federal government to intervene in private business investment in the U.S. According to an EY report, in 2022, small businesses made up about 85% of all private equity-backed businesses. That same year, private equity was estimated to have contributed $1.7 trillion to U.S. GDP. Sen. Warren’s bill would negatively impact a significant portion of the U.S. economy.
Sen. Warren claims she is introducing this legislation as a reaction to the Steward Health Care transaction. To overhaul the regulatory structure for private markets over one transaction’s foibles is not based on solid or rational reasoning. For example, the bill’s provisions to empower pro-ESG/DEI labor unions is entirely unrelated to that specific transaction. Instead, Sen. Warren’s bill would benefit a select few, notably, certain union bosses living in luxury, who threatened to shut down transoceanic commerce via American ports on the East Coast and Gulf of Mexico.
The bill’s new reporting requirements and disclosures are superfluous. Private credit in particular poses no systemic risk and offers stability in volatile times, senior secured credit in the event of bankruptcy, and better returns than public fixed income investments. Moreover, private funds are designed to be different from other financial institutions, such as banks. The Dodd-Frank Act makes a distinction between retail investors, who need more disclosures and protection, and sophisticated institutional investors. The U.S. Court of Appeals for the Fifth Circuit reaffirmed this distinction when it struck down the SEC’s rule to further regulate private fund advisers.
Sen. Warren also erroneously targets carried interest. “Carried interest” is a fraction of profits general partners of private equity, venture capital, and real estate funds, earn after they pay back their “limited partner” investors (e.g., pension funds). Sen. Warren’s bill would arbitrarily tax carried interest at a higher rate. Carried interest is used in partnerships spanning many sectors. Applying a higher tax rate could potentially harm industries such as “oil and gas, real estate, and small businesses.” Another paper that analyzed venture capital funds found that changing the tax treatment “to ordinary income rates would significantly reduce the attractiveness of forming a new fund.” A higher tax rate limits the availability of affordable investment options for American workers and retirees.
Lawmakers should quit chasing carried interest and instead pursue legislative initiatives that balance the budget by reducing government spending. Spending is out of control, so much so that “debt held by the public in 1981 amounted to about 25 percent of GDP; today’s debt amounts to more than 100 percent of GDP.” Just this week, the federal government’s 2024 fiscal year budget deficit clocked in at $1.8 trillion even though tax revenues continued to rise. Imposing more punitive taxes on private fund advisers is a lost cause and excruciatingly misguided.
The bill also astonishingly raises taxes on private equity-backed portfolio companies by removing tax deductibility on interest expense. It also arbitrarily repeals the Sec. 199A tax deduction from President Trump’s Tax Cuts and Jobs Act (TCJA) for real estate investment trusts (REITs). The bill also upends conventional Chapter 11 bankruptcy procedures and likely conflicts with state corporate law.
Additionally, Sen. Warren’s legislation ignores a years-long bipartisan agreement that the Securities and Exchange Commission (SEC) would not be allowed to finalize rules to require certain political or social disclosures. Since 2015, Congress has passed appropriations bills with a provision that prohibits the SEC from writing or finalizing a rulemaking that would require the disclosure of lobbying, political contributions, and donations to tax-exempt organizations. For fiscal year 2022 appropriations, Congress codified this explicit prohibition:
SEC. 633. None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.
Sen. Warren’s bill would upend this precedent and compel private funds to make these disclosures.
If this bill is enacted, the only winners will be left-wing special interest groups and labor union bosses. The losers are everyone else. Using this bill as a blunt tool to eviscerate private businesses is an egregious assault on American free market capitalism. Lawmakers should strongly oppose Sen. Warren’s bill.