Tax Debate Heats Up

 

 

Beware of the mother of all tax hikes-the single largest tax increase in American history. If the Bush tax cuts of 2001 and 2003 are allowed to expire-a fate the crafters of the Tax Reduction and Reform Act of 2007 assume-the $1.3 trillion tax jump would swell to $3.5 trillion.

 

But these figures don't even begin to show how much damage this bill would do. It is a poison pill for capital investment, job growth, entrepreneurialism, and the very ingenuity that has long propelled our economy to greatness.

 

The impact on small businesses and middle class American families would be devastating. New York Democratic Rep. Charles Rangel's scheme to slap these two vital pillars of America with a 4% income surtax would make their respective taxes among the highest in the developed world. Because small businesses are the lifeblood of our economy and the creators of millions of jobs, an attack of this magnitude would surely trigger mass layoffs and cuts in health insurance coverage. 

 

The surtax assault on small businesses and families joins an array of other growth-stifling volleys in the bill. Additional principal targets include investment ventures and other mom-and-pop partnerships.

 

These proposed tax hikes could not have come at a more inopportune time. A vexing credit crunch, volatility in the capital markets, and a worldwide slashing of tax rates on investment have combined to make capital investment harder to come by.

 

Congress should focus on helping our capital markets straighten themselves out. Instead, a desire to find spending offsets has fueled a drive for antigrowth tax hikes.

 

 

 

Corporate stock options and the carried interest received by private equity managers are both risky, performance-based compensation for services tied to the value of a capital asset.

 

But while private equity managers pay the 15% capital gains rate on that compensation, corporate executives pay ordinary income tax rates of up to 35%, plus payroll taxes when they exercise their stock options.

 

Tax policy must be rationale and equitable if people are going to have confidence in the system. The distinction we need to draw is whether the portion of profits that investment fund managers take for managing their investors' assets is investment income or  really compensation for services.

 

Many experts, including the chairman of the Cato Institute and senior economic advisors to the last three Republican presidents, agree that carried interest is a performance-based fee that should be taxed accordingly. One private equity manager, Leo Hindery, has been quite blunt: "It really isn't all that hard to decide how to properly tax carried interest. … [I]f it is a performance fee, as my 20 years of firsthand experience clearly tells me it is, then it should be taxed as ordinary income."

 

My legislation would correct this inequity by requiring individuals who manage investment partnerships to pay ordinary income tax rates on carried interest they receive as compensation in exchange for services, while protecting the capital gains treatment of any personal investment that managers may have in the fund. 

 

The tax priorities of the majority in Congress are clear: fairness, middle class tax relief, simplification, and economic growth. Correcting the treatment of carried interest is a step in the right direction.