Raising taxes on carried interest capital gains will eliminate 4.9 million jobs and cause pension funds to lose $3 billion per year, according to a new study by the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

Democrats have proposed raising taxing carried interest capital gains. President Biden’s fiscal year 2022 budget called for doubling the tax rate from 23.8 percent to 43.4 percent, while Senate Finance Committee Chairman Ron Wyden (D-Ore.) has introduced legislation that would double the tax and require taxes to be paid on unrealized gains every year.

Raising Taxes on Carried Interest Capital Gains Would Cost Jobs and Reduce Life Savings

This tax increase would hit private equity, venture capital, real estate partnerships, and their portfolio companies which collectively account for over 25 million American jobs. It will cause these firms to downsize and decrease investment, which in turn will cause a loss of jobs and a reduction in the returns investors see.

This could affect Americans in every state. For instance, private equity investment supports 11.7 million jobs across the country including 1.5 million jobs in California, 1 million jobs in Texas, 738,000 jobs in Florida, 421,000 jobs in Ohio, and 359,000 jobs in Michigan.

One third of all private equity investment comes from public pension funds so raising taxes on carried interest will harm firefighters, teachers, and police officers that have their life savings invested in these funds. For instance, the California Public Employee Retirement System has $26.5 billion invested in private equity, the Teachers Retirement System of Texas has $23.9 billion invested, while the California State Teachers Retirement System has $23.5 billion invested.

Raising Taxes on Carried Interest Capital Gains is Bad Tax Policy

While the Left frequently characterizes this tax provision as a “loophole” it is actually based on longstanding tax principles.

First, carried interest capital gains is treated as partnership income, meaning taxation flows through to the individual taxpayers. In this case, carried interest is the investor’s share of partnership income they receive for providing expertise on investment decisions. All taxpayers involved in the partnership – those providing expertise and those providing capital – are taxed the same.

Second, carried interest is treated as capital gains income as it is earned through long-term investment, not as ordinary income.  Investors hold the portfolio companies for a significant period of time, often 5 to 7 years. There is no justification for treating this as ordinary income – the investor purchased an asset, grew the asset by making it more economically valuable, and sold the asset at a profit – exactly the same as other types of investment.

Raising taxes on carried interest capital gains should be rejected. It is terrible tax policy that would harm economic growth, reduce jobs, and reduce the returns of public pension funds across the country.