For over three years, the private equity industry’s main lobbying group successfully fought against moves to increase taxes on carried interest. Then, Max Baucus and Sander Levin had to go screw it all up yesterday by slipping carried interest legislation into a big tax and spending bill.
That didn’t go unnoticed by the Private Equity Council’s president Doug Lowenstein, who issued a tersely-worded statement yesterday:
"At this time of great market uncertainty, now is not the time to upend more than 50 years of partnership tax law characterizing carried interest as a capital gain," he said. "This punitive, 157 percent tax hike on growth investment by real estate, venture, private equity and other firms will hurt those companies that are most desperately in need of capital to sustain or create jobs and drive growth."
According to The Hill, the first 2 years after the legislation is enacted, carried interest will be taxed at ordinary income and capital gains rates — a 50/50 split, which amounts to a tax rate of roughly 30 percent. That split changes to 75/25 after 2 years, which amounts to a 35 percent rate.
The National Venture Capital Association, which has been running ads on Politico, also decried the bill:
“The provision in HR 4213 to tax 75 percent of venture capital carried interest at ordinary income rates and 25 percent at capital gains rates will more than double the taxes that long term investors pay when they build successful companies and create jobs. While this provision is movement away from a pure change to ordinary income, evidencing a House recognition that this type of long term investment is critical to US economic growth, it by no means creates enough of a differential to continue to encourage long term investment in America’s start up companies. We hope that this provision can be amended so that there is a meaningful differential – and a real incentive for venture investors to work with entrepreneurs to continue to build America’s next generation of employers.
The venture industry takes serious issue with the title of this bill for two reasons. First, referring to the carried interest tax structure as a “tax loophole” is untruthful. The capital gains treatment of carried interest has been a legal part of the tax code for decades. Additionally, to characterize this as an “American Jobs “ bill is ironic as doubling the taxes on job creators will result in less jobs, not more, effectively negating any provisions in the bill that will actually support US employment numbers. The venture capital community has continued to create thousands of US jobs each month throughout the recession without any type of government subsidies and plays a critical role in our country’s economic growth and ongoing global competitiveness. This role needs to be supported by Congress.
We urge members of the House of Representatives and those in the Senate working on legislative language of their own, to seriously reconsider the carried interest provision and redraft the language so that a meaningful differential is maintained and long term investment in start up companies is encouraged at a time when America needs jobs the most.”