The Carried Interest Break: It’s More Than A Giveaway To Hedge Funds


Megan Barth Contributor
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Now that the Senate Budget Committee has come to an agreement on the specifics for tax cuts, it’s decision time for Rep. Kevin Brady and the House Ways and Means Committee.

To achieve the new 10-year goal of $1.5 trillion in tax relief, those who doubt the effects of conservative fiscal policy on economic growth believe that some tax breaks must soon be abandoned.  At this stage of the game, the big-picture fiscal arguments are losing ones, so now the debate is centered around which provisions should be scrapped.

Sources on the Hill suggest that the House tax-writing committee’s initial foray in the process is centered around the capital gains tax rate and its progeny – the so-called carried interest tax provision. Hopefully, they come to the conclusion that in order to continue achieving the fastest GDP growth in years, we must retain the current treatment of carried interest.

Carried interest is a tax that partnerships and investment vehicles pay out for those who manage the partnership. Since the inception of the income tax in 1913, that income has been taxed at the capital gains rate, which has always been historically lower than the income tax rate.

This may sound like a giveaway to the rich, but it’s not: it’s an incentive for taxpayers to take risks in the economy. After all, this is money they may never see again.

Don’t get me wrong: as a supporter of a flat tax, I believe that both workers and investors should pay the same low rate. Unfortunately, thanks to the Democrats, most talking heads in the political arena are not arguing whether workers and investors should be paying an identical rate. Instead, they are demanding that the capital gains rate goes even higher, all while the working class are expected to continue suffering.

Sen. Ron Wyden (R-OR), for instance, has openly argued that the capital gains tax rate be more than doubled. Other Democrats are singing off his same song sheet. Eliminating the carried interest provision would be the first move in the left’s long-term strategy to jack up the capital gains rate.

Generally, supply-siders and free market economists believe that encouraging investment is critical to the future of economic growth.  As the economy struggles to climb out of the abyss created by the eight years of a high tax and regulatory environment, it is critical that the Republicans in Congress reduce taxes, not raise them.

Chairman Brady has been a champion for tax reduction, announcing support for a Reaganesque “bold, pro-growth tax reform.” History shows that his ideas are right on the mark. Under the Reagan tax cuts of 1981, the capital gains tax rate was reduced from 28% to 20%.  That stimulated a massive increase in economic activity, causing revenue generated by the tax cut to increase by 50% within 18 months.

I understand that due to the constraints of the Senate compromise, Republican leadership cannot get everything it wants. However, it would make no sense for Mr. Brady to cave on carried interest to appease the most extreme elements of the Democratic Party – especially when considering the radical, long-term agenda that Wyden and others plan to implement once it occurs.

From Venetian investors and traders to Texas wildcat oiler drillers, the principles behind carried interest came about because they made economic sense, an example perhaps of Hayek’s “spontaneous order.” It was the market, not government, that found an equitable and correct solution to dealing with risk.  Now government wants to again get in the way.

Investors often wait years to make money – if they ever do at all. Populists have every right to criticize the greedy hedge fund crowd, but it’s undeniable that incentivizing investment is critical to economic growth. Eliminating the carried interest provision would have the opposite effect, motivating Americans to sit on their money rather than invest it.

Regardless of what one’s general opinion on Wall Street is, everyone — especially the spending-addicted Keynesians on the left — can and should agree that Washington discouraging natural economic activity is a bad thing. If removing tax incentives or increasing revenue raisers is a must for bipartisan reform, let’s find something less critical to target.

Megan Barth is the founder and proprietor of ReaganBabe.com and a nationally recognized political commentator. She is a weekly cohost for WAR-The Wayne Allyn Root Show out of Las Vegas, NV and has appeared on Headline News CNN, NewsMax TV, One America News Network, The Tipping Point with Liz Wheeler, America Trends with Dr. Gina, The Blaze Radio, and other nationally syndicated radio shows.