Thursday, November 17, 2011

Private Equity Groups Ask Deficit Reduction Committee Not to Raise Taxes on Carried Interest

In a letter to the co-chairs of the Joint Select Committee on Deficit Reduction, a consortium of private equity groups opposed proposals to increase taxes on carried interest and urged them to oppose their adoption. In the letter to Senator Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX), the groups said that carried interest is a profits share that partners in hedge funds, private equity firms, and venture capital firms receive on the capital gains from long-term investments in capital assets.

Unlike a salary, carried interest income is not guaranteed, said the groups, often takes many years to vest, can be clawed back if subsequent investments are not successful and is dependent on the increased value of the investment. Carried interest serves as an important incentive to encourage prudent investing, noted the private equity associations, which is why Congress has taxed carried interest as a long-term capital gain for over 60 years. Carried interest is not a loophole, they insisted, but an incentive that aligns and focuses investor efforts to grow companies over the long run.

The proposal to increase taxes on carried interest would also tax the enterprise value of those partnerships at ordinary rates, the groups insisted, which would deny those who spent many years building their businesses long-term capital gains rates if the business is eventually sold in whole or in part. Under this proposal, said the groups, investment partnerships would be the only form of business in America subject to this discriminatory treatment. The enterprise value tax increase has faced bipartisan opposition in the past and is inextricably linked to the larger carried interest proposal that would only further undermine economic recovery, they said.

Along with enterprise value, another problem the groups have with the carried interest proposal concerns family partnerships. Families invest together throughout the U.S. in partnerships for many ventures. The carried interest proposal would treat any partnership in which one partner loans money to another, or they jointly guarantee bank loans, as being subject to the carried interest rules. This is even though no carried interest exists whatsoever.’

More broadly and on a policy basis, at a time when long-term investment should be encouraged to create and grow companies, observed the groups, more than doubling tax rates on carried interest and enterprise value would discourage further investment. To the extent that policy makers would like to debate appropriate tax rates on long-term capital gains, including carried interest and enterprise value, that is a topic more appropriately discussed within the context of fundamental tax reform.

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