George Gibbs Center for Economic Prosperity

Ma⁠i⁠n⁠t⁠a⁠i⁠n⁠i⁠ng low ⁠t⁠ax ra⁠t⁠es for cap⁠i⁠⁠t⁠al ga⁠i⁠ns good pol⁠i⁠cy

By: Guest Author / 2016

This column first appeared in the Tallahassee Democraton November 2, 2015.

The presidential race is taking shape and candidates for both the Republican and Democratic nominations will inevitably outline their positions on the future of tax policy. You will hear musings on marginal tax rates, corporate taxes and offshore taxes. You’ll hear promises of reducing rates, increasing revenue and expanding the tax base. Buried in much of this will be the discussion of a little-known but important facet of tax policy called “carried interest.”

Carried interest is the capital gain resulting from when an equity manager – typically managing pools of resources invested by universities, charitable trusts and pension funds – realizes gains on an investment pool.

Some want to tax “carried interest” as ordinary income – income that is subject to the tax rates borne by typical wage earners. This is both bad policy and misleading in its aim. The tax rate for capital gains is currently lower than that for most ordinary income, as it is a direct tax on savings and investment. In other words, that saving and investment has often been taxed as ordinary income already.

It’s important to note those who would ultimately be impacted by this tax hike. If you are one of the tens of millions of individuals with 401K funds or with a pension or who give to a charitable foundation, you would bear the cost of this tax hike. If you are attending college, or a parent of a college student, and you receive any form of financial assistance (scholarship, grant, loan), you would bear the cost of this tax hike. If you invest in a mutual fund or a Roth IRA because you want to have a more secure retirement, you would bear the cost of this tax hike.

Last year, the federal government collected approximately $3.5 trillion in tax revenue. Raising taxes on carried interest would amount to $1.5 billion in additional revenue for the federal government – just 0.04 percent of the total – and would have a far greater negative impact on savings, investment and long-term economic growth. Florida would also be impacted more negatively than most. Consider the following:

About 170 private equity firms are headquartered in Florida
About 1,400 private equity backed companies are headquartered in Florida, employing more than 825,000 people
Over the past 10 years private equity firms have invested $225 billion into Florida companies
More than one million current and former state employees enrolled in the Florida Retirement System benefit from the $7 billion of FRS assets in private equity funds

Is reform of an almost four million-page tax code needed? Absolutely. However, the key to economic prosperity is not in raising rates on investment gains, thinking that more revenue for the federal government is the panacea.

Let’s make sure that both Republicans and Democrats understand, as a matter of policy, we should be seeking to encourage savings and investment for the long-term growth of the economy. The best way to do that is to maintain low rates for capital gains.