Senator Susan Collins (R-ME) has introduced two amendments to increase taxes on carried interest capital gains. ATR urges a NO vote on both Amendments.
Increasing taxes on carried interest capital gains would impact pension funds, charities and colleges that depend on investment partnership structures in order to meet savings goals. Small businesses would also be badly affected, as investment money available from these partnerships dries up.
Under the amendments, the revenue from this tax increase would be spend on increasing child tax credit spending subsidies in one amendment and increasing the deduction for medical expenses in the other amendment. However, by increasing taxes on investment, these amendments would negatively affect the economy.
America’s capital gains taxes are already among the highest in the world. The top rate has increased from 15 percent to 23.8 percent in the last 8 years alone. A study by Ernst and Young placed the top U.S. integrated rate at 56.3 percent after accounting for the corporate tax, federal and state capital gains taxes, and the Obamacare net investment income tax – far in excess of the average integrated rate of other OECD nations and the five BRICS countries which sits at just 40.3 percent.
In addition to harming the economy, an increase in carried interest capital gains is bad policy. There is no difference between carried interest and any other type of capital gain. Carried interest is the investor’s share of an investment partnership between the investor and individuals providing expertise on investment decisions. These partnerships generate income through a long-term investment in the same way as any to which the capital gains tax applies – individuals do not benefit from any special treatment. There is no sound basis for taxing these returns as ordinary income.
The better policy would be preserving the base of the capital gains tax to promote investment by maintaining current law (or reducing taxes on all capital gains). Multiple layers of taxation under our tax code mean that there is little rationale for taxing income derived from a capital gain, as investment in capital is derived from income which has already been taxed at the individual level prior to reinvestment in the economy. Double taxation discourages savings, suppresses productivity, and discourages investment. It acts as a barrier to job creation, wage growth, and economic growth.
ATR Urges a NO Vote on both amendments and any amendment increasing taxes on carried interest capital gains.