By Amy Leisinger, J.D.
The U.S. Chamber of Commerce has released a study exploring the economic effects of legislation introduced by Sen. Elizabeth Warren (D-Mass) on the private fund industry. Private equity firms make substantial contributions to the economy, and legislation such as the Stop Wall Street Looting Act imposing tax increases and additional liabilities on private funds that invest in businesses would ultimately harm the American workforce and the businesses that rely on private fund capital.
"Private equity firms make valuable, long-term investments in U.S. companies, supporting over 26 million U.S. jobs and driving economic growth by contributing over $475 billion in annual tax revenues," U.S. Chamber Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman noted.
The legislation. Among other things, the Stop Wall Street Looting Act (S. 2155/H.R. 3848) would impose additional leverage caps on private equity firms and tax private equity profits at ordinary tax rates as opposed to those applicable to capital gains. In addition, private equity firms would be held liable for debts and other obligations of their underlying companies. In addition, the legislation changes bankruptcy law to place additional focus on workers’ interests in the bankruptcy process. The legislation is designed to bring greater transparency to the private fund industry while also enhancing related investor protections.
According to a press release issued by Sen. Warren, the bill would "empower[] workers and investors" and help to protect markets regarding high risk forms of debt.
Economic concerns. In its report, the Chamber of Commerce notes that the private equity funds created by private equity firms invest in various companies and play a major role in their development. These companies employ millions of people in the U.S., and, as such, the private fund industry drives economic growth and supports the American workforce. In addition, the report states, the firms contribute billions in annual federal and state and local tax revenue and support investments by pension funds and public retirement systems.
However, according to the report, the Stop Wall Street Looting Act would impose significant restrictions, liabilities, and tax increases on the private fund industry, including by capping private equity leverage and taxing profits at ordinary tax rates. In its study, the Chamber of Commerce found that these changes could cause a loss in the range of 6.9 million to 26.3 million jobs and decrease combined tax revenues from $109 billion to $475 billion per year.
Further, the report continues, the increased restrictions and enhanced liabilities could disincentivize business formation and growth and impose risks for private equity managers and investors. Discouraging private equity investment in companies could result in increased business failures, as well diminished returns for private equity investors, according to the report. Because most taxes in private equity are paid by business partners on their individual tax returns, the increased taxes act as a tax on efforts of those who help grow businesses, the Chamber of Commerce opines.
Increasing restrictions, risks, taxes, and liabilities could potentially drive participants out of the industry, leaving firms seeking private equity financing unable to find necessary capital, the report concludes.