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.