Will Kevin Brady Punish Investors With Tax “Reform?”

Andrew Langer President, Institute for Liberty
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The clock is ticking on tax reform. 

As the August recess quickly approaches, many pundits are recognizing that Congress must move quickly if needed tax reductions will ever be enacted into law.  Rep. Mark Meadows (R-NC), the Chairman of the Freedom Caucus, has gone so far as to recommend working through August if a vote is not achieved.  That’s good advice.

In addition to passing tax relief, Rep. Richard Hudson is leading the effort to ensure Congress passes the right kind of tax reform.  As per a recent letter to the Chairman of the House Ways and Means Committee, Rep. Kevin Brady, Hudson joined 21 other members — among them: Rep. Louis Gohmert (R-TX), Pete Sessions, Trent Franks (R-AZ), and Ted Budd (R-NC) – who rightfully argue that “lowering rates for individuals and businesses will free up much-needed capital to give the economy a boost…” 

A core tenet of that principle rests in an obscure, yet critical provision known as “carried interest.” Carried interest allows the manager of an investment fund or partnership to be compensated with the profits of the funds, taxed as capital gains rather than income.

As Mr. Hudson and his allies note, ending carried interest would “arbitrarily punish investors in real estate, venture capital, private equity and other partnerships by treating their gains differently than those of other investors.” According to the IRS, there are 27 million partnerships, and all would be negatively impacted.

There is a move afoot to end carried interest. In fact, some openly argue that eliminating carried interest is a stepping stone toward ending the lower capital gains tax rate to replace it with the higher income tax rate. This has real life implications.

The capital gains tax rate has been historically lower than the income tax rate because of the risk associated with investment, as well as to encourage more free-flow into the economy.  Some Bill Clinton-era progressives who used to support lowering the capital gains tax rate as a way to spur investment now dream of tying it to the income tax rate. This is nothing short of a massive tax increase that would damage the economy and damage investment.

In their letter, the members of Congress note that carried interest is not a loophole and eliminating it would punish investors with higher tax rates. Since the election of Donald Trump, the stock market has seen a dramatic increase.  Some call it the “Trump Bump.”  Many believe that increase is predicated on the belief that Congress will pass a tax cut that will spur investment, increase economic activity, and bolster the economy.  Eliminating carried interest would be a step in the wrong direction and probably turn the “bump” into a late-summer stock market “dump.”