The only things certain in life are death and taxes. Rarely, however, do you find a tax plan bad enough to guarantee them both. Such is the nature of the proposed scheme to double taxes on capital investment through the deceptive cry to close the so-called “carried interest loophole.” This proposal could kill growth on Utah’s “Silicon Slopes” — a growing nexus of tech ventures along the Wasatch Front.
Under current tax law, investment fund managers pay ordinary income taxes on management fees and capital gains taxes on carried interest — a type of gain on the value growth of the investment. Tax policies that treat investment gains differently than income are designed to incentivize savings and investment — critical factors in the equation for economic growth.
Lobbyists for this enormous tax hike call those who disagree “ideologues” and “zealots” with “dogmatic views” and insist that we need to double these taxes in the name of “equality” and “fairness” and to reduce the deficit. However, not only would this policy not make a significant dent in the deficit, it would reduce capital investment while causing pension funds, university investment funds and charitable funds to take a hit.
The sad irony about this call for fairness is how failed government policy itself has perpetuated unfairness. Artificially low interest rates from the Federal Reserve, aimed at keeping government debt afloat, harm the savings efforts of average Americans — particularly seniors. Meanwhile, Washington, D.C., is now the highest-paid region in the country. The federal government and its generously paid bureaucrats are taking a larger slice of the economic pie; now those in Washington want to turn their crosshairs to America’s hard-earned savings to fuel its insatiable spending appetite.
As U.S. workers sustained layoffs and wage stagnation during the recession, Washington boomed. Unrestrained federal spending in the face of reduced tax revenue fueled the bureaucracy bubble while Main Street suffered. Now, leftist ideologues call for more taxes on the very investments designed to help Main Street recover. Calls for “fairness” from Washington, D.C., should fall on deaf ears.
Tax hike advocates argue that tax collections from carried interest would be a panacea for the federal budget and deficit. However, collection estimates place potential annual tax revenue from the tax hike at only $1.7 billion per year, or 0.05 percent of the federal budget — a quarter percent of the annual deficit. Put in perspective, tax hikes on carried interest might generate enough to fund just our military for a single day each year — hardly a budget panacea.
However, the economic costs would bring very real harm to states like Utah with many young and growing companies. Moreover, the only way out of our government debt is intense economic growth — the very type of growth that is fueled by investments from capital funds.
Tax hike advocates characterize current rates as a giveaway to the wealthy. The reality is that by incentivizing investors to risk capital, companies can access more funds to expand and hire new employees, leading to job and income growth. As the investment pays off and as the company succeeds, the fund managers recognize their gains in the form of carried interest while workers realize more and better paying jobs. The management fees these investment firms charge for their work is taxed at the ordinary income rates, but the partnership portion of the gains that accrue from those investments are taxed at capital gains rates.
Capital funds are of particular benefit for entrepreneurial ventures — something very important to Utah’s growing economy. One need only look out the window to see office buildings and new companies popping up everywhere. If you were to pull back the financial curtain, you would find that many of these ventures are buoyed by investment funds — capital that is available largely because of low tax rates.
Our hometown NBA team, the Utah Jazz, plays in the newly re-named Vivint Smart Home Arena. Vivint’s success is a great example of investment capital fueling growth. The Utah-based startup was acquired by Blackstone, a New York based private-equity fund. Utah has become a top 10 destination for investment capital as Wall Street funds have found start-up gold on our Silicon Slopes. The calls for Congress to more than double the taxes on investment gains for large capital funds could be a death sentence for these critical investment dollars, which contribute to job growth in Utah.
Washington needs to learn that soaking the investor class by doubling taxes is not a sound budget strategy — cutting spending is what is needed. Utah’s Sens. Orrin Hatch and Mike Lee should resist this proposal.
Josh Daniels is a policy analyst at Libertas Institute.