In anticipation of this week’s GOP policy retreat in Philadelphia, two of Washington’s most influential taxpayer groups have sent a letter urging President Donald Trump and Congress to make it a top priority to craft a tax reform proposal that promotes, not punishes, investments. Grover Norquist, founder and president of Americans for Tax Reform and Pete Sepp, president of the National Taxpayers Union stressed efforts to reduce taxes on the American people including reducing the tax burden on investments.
According to Norquist and Sepp, during the eight years of the Obama administration, “The top tax rate on investments increased from 15% to 23.8%, and the top integrated rate currently sits at 56.3% compared to the OECD/BRIC average of 40.3%.” With a Republican in the White House working with a Republican-led Congress there is a real opportunity to reduce taxes on capital gains, and all forms of capital gains should be protected from any incremental increases.
The class warriors have long set their sights on raising the long-term carried interest capital gains. As the Norquist and Sepp letter notes:
Carried interest capital gains income is earned through a net gain within a partnership formed between individuals with capital and an expert investor. They are indistinguishable from any other type of capital, and so they are paid at the same capital gains tax rates.
Critics of the tax law believe that carried interest should be treated as ordinary income, but that makes little sense since it involves a long-term ownership stake in an operating business owned for years and carries all the risks that the investment may never return a profit.
Many on the left argue that changing the tax treatment of carried interest capital gains would generate significant revenue that would fix all our budget shortfalls. However, the facts just don’t add up, and the increased revenue to the federal government would equal just a few hours of operating costs per year. And in the process, it would deprive venture capital, private equity, and real estate partnerships of the long-term capital gains treatment many other types of businesses are permitted.
For over a century, carried interest has been treated as capital gains. And pension funds, charities, and colleges all depend on investment partnerships to reach their savings goals. Small businesses would also suffer as the investment money they desperately need to build their companies dries up because it no longer makes good financial sense to invest.
President Trump campaigned on promises of economic growth for all Americans. Any tax increase that specifically targets private equity, venture capital, real estate, and other long-term business investments will stifle job creation and innovation. The IRS reports there are more than 3.2 million partnerships and more than 22 million partners in the United States. A tax increase on capital gains would negatively impact many of these companies by limiting their ability to raise money for growth.
The congressional GOP retreat is a great opportunity for tax reform advocates like Mark Meadows (R-N.C.), chairman of the Freedom Caucus, to remind his colleagues that lowering, not raising, taxes will encourage economic growth. Congress and the administration should look to the House GOP blueprint, which recommends that capital gains be lowered, not raised, to help make America great again.
It is hoped that members of Congress come out of the GOP policy retreat in Philadelphia with pro-growth ideas and a plan for a massive tax cut on the American people. Using “carried interest” tax hikes to pay for other tax cuts would be a mistake, because it would hinder growth. Norquist and Sepp are experts in the field, and it would be a good idea to promote investment and starve the government beast that is spending far too much of American’s hard earned dollars.