Guess what? Prominent Democrats in Congress may soon pass a huge tax
increase. This tax increase will affect all, not just Wall Street.
Because what is proposed is almost unknown to the American people and
unless you, the American people, learn about this tax increase and
protest to high heaven, they will succeed.
The proposed tax increase is H.R. 2834, a bill to amend the Internal
Revenue Code of 1986 to treat income received by partners for performing
investment management services as ordinary income received for the
performance of services. It sounds innocent, but the truth is that since
Harry Hopkins pronounced the formula to tax and tax, spend and spend,
and elect and elect, many Democrats have adopted this as their motto. I
am afraid that far too many Republicans also have an insatiable appetite
for over-spending.
Leading the charge against this new tax is the Chief Deputy Minority
Whip Representative Eric Cantor (R-VA). Cantor is not opposing this tax
to be partisan. He is doing so because it is consistent with his record
since coming to Congress.
H.R. 2834 is sponsored by Rep. Sander M. Levin (D-MI) and would
reclassify carried interest as ordinary income. That represents a 133%
on so-called flow-through investment partnerships. Retirees and anyone
on a pension would be especially hard hit by this approach. The proposal
would tax carried interest at 35% instead of the capital gains rate of
15%. Pension funds are some of the biggest investors in flow-through
investment partnerships. Raising taxes on the partners will hurt the
investors.
This measure does the opposite of what good public policy should. Good
public policy creates capital. It does not discourage one from taking
risks. Carried interest represents the sweat equity which general
partners put into the deal. It is, in fact, capital and should be
treated as such, which means taxing it at capital gains rates.
The management fee is already taxed as ordinary income, the profit
-interest, or carry, represents an investment in the partnership. The
tax treatment of profit interest on so-called flow-through entities has
been settled for decades.
While compensation of employees and independent contractors is typically
fixed and payable regardless of the success of the business, a partner's
distributive share of partnership income is subject to the
entrepreneurial risks of the partnership's business. The partners are
rewarded only if the partnership succeeds.
A manager gets nothing back for his profit interest unless investors get
all of their money back plus the negotiated rate of return. Wage earners
are not taking that kind of risk. The policy reasons for drawing a
distinction between long-term capital gains, short-term capital gains
and ordinary income are the same as for giving capital gains treatment
for carried interest. Current taxation of carried interest encourages
the pooling of capital, ideas and skills in a manner which promotes
entrepreneurship and risk-taking. The issue is whether Congress wants to
change capital formation and the incentives for long-term investment.
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