Mother of All Tax Hikes Update

Nov. 6, 2007

Dear Representative:
 
On behalf of the members of Americans for Prosperity, I am writing to urge you to vote against H.R. 3996, the so-called Temporary Tax Relief Act of 2007.  While H.R. 3996 contains some temporary relief for America’s taxpayers, it also includes billions of dollars of permanent and unnecessary tax hikes, including the so-called “carried interest” tax hike, which could adversely impact millions of everyday Americans who are now invested in the stock market.  These tax hikes will have negative economic consequences and will set a dangerous precedent for tax policy.  We therefore urge you to vote NO and will rate a vote against H.R. 3996 or a related procedural vote as a Key Vote for Prosperity in our Congressional ratings.

Under current law, when a limited partnership has income, it flows to the partners and they pay tax on it based on the character of the underlying income — if it’s ordinary income they pay ordinary income tax, and if it’s capital income they pay capital gains tax.  Under H.R. 3996, the character of the underlying income no longer matters. Even if the income is from the sale of corporate stock, the portion that general partners retain as a carried interest would be taxed at the full ordinary income tax rates.

This goes against every rationale for having a lower capital gains tax rate. The primary rationales are to alleviate the double taxation of corporate source income, to avoid taxing inflationary gains, and to encourage capital formation, entrepreneurship, and investment. All of these rationales obtain in the carried interest case, because the income really is capital income. This is about hiking the capital gains tax for a particular group of politically unpopular taxpayers, with serious economic consequences for many smaller investors.

Moreover, this is the first time Congress will vote on whether the capital gains tax rate should remain at 15 percent, or whether it should be increased for some taxpayers.  The outcome will set an important precedent for whether the 15 percent rate, which has been an enormously successful policy, will be raised for all taxpayers.
 
For these reasons, we urge you to vote against H.R. 3996.

Sincerely,
 
Tim Phillips
President, Americans for Prosperity

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