Congress Should not Impose a Damaging Small Business Tax | Citizens Against Government Waste

Congress Should not Impose a Damaging Small Business Tax

The WasteWatcher

After agreeing to a $3.5 trillion budget resolution in August, House and Senate committees are beginning to fill in the details on taxes and spending.  The first committee to start marking up the provisions of the reconciliation bills within their jurisdiction is the House Ways and Means Committee, starting with opening remarks on Thursday, September 9, and markup beginning next week.  The committee is supposed to come as close as possible to increasing taxes enough to pay for the spending, including a tax on carried interest. 

The Council for Citizens Against Government Waste (CCAGW) will be launching a digital ad campaign urging taxpayers to express their opposition to this unnecessary and harmful tax.  The ad cites rising prices, labor shortages, and a new strain of COVID-19, with the economy "hanging in the balance," then asks why members of Congress would try “to make things worse with a new investment tax on small business?”

House Speaker Nancy Pelosi (D-Calif.) said she is “excited” and “exhilarated” to be raising taxes and spending trillions of dollars, and Senate Budget Committee Chairman Bernie Sanders (I-Vt.) claimed that he “already made a compromise,” since he wanted to spend $6 trillion.  There is a lengthy wish list of proposed tax increases, many aimed at “the rich,” and allegedly protecting anyone making less than $400,000.  They include dozens of ideas, like carried interest, that have floated around for many years and failed to make it through Congress, often because the impact of the tax goes far beyond the targeted “wealthy” individuals. 

On September 7, 2021, the U.S. Chamber of Commerce Center for Capital Market Competitiveness released a report, “Impact on Jobs, Tax Revenue, and Economic Growth of Proposed Tax Increase on Carried Interest,” which found that the tax would reduce incentives to invest, diminish the ability to find financing, reduce employment by up to 4.9 million jobs and cut tax collections by $96 billion over five years, and cause pension losses of up to $3 billion.  While the tax would be imposed on private equity and venture capital companies, along with real estate partnerships, which the report noted accounts for more than 25 million jobs and $493 billion in combined federal, state, and local tax revenue, the impact would be widespread and damaging across the entire economy.   

The inclusion of the carried interest tax as impacting “the wealthy” represents a fundamental misunderstanding of how it works and ignores the substantial losses in investment and resulting economic growth that would occur if it were taxed as ordinary income.  The Internal Revenue Code has treated carried interest as capital gains income for more than 100 years.  In 2017, the holding period for these gains was increased from one to three years, and that should remain the only change in its treatment.  Carried interest reflects an ownership stake in an operating business, which is often owned for many years with the risk that the business will fail, and the investors will get nothing in return.  And if certain profits are not achieved, carried interest income is returned.

The impact of this new tax would be felt by the thousands of small businesses that rely on private equity and venture capital investments, along with small real estate and affordable housing projects that rely on real estate partnerships.  These investments are included in the pension funds of retired public employees, including firefighters, police officers, and teachers.  While private equity makes up 9 percent of the assets in public pension funds, the annualized return on private equity from 2010-2010 was more than 12 percent, as opposed to the overall return of 4.5 percent, a difference that would likely be substantially reduced or potentially disappear entirely if carried interest was taxed as ordinary income. 

Most members of Congress have never run a business or taken a risk with their money to create jobs.  They believe that the government knows better how to “invest” everyone’s money, even after the results of their “investment” has been record budget deficits and a $28.7 trillion national debt. 

Citizens Against Government Waste noted in an April 28, 2021, blog post, that taxing carried interest as ordinary income would “generate less than $14 billion over 10 years.  The small amount of money that would be added to the Treasury is more than offset by the negative impact this change in the tax laws would have on private investment.”

Logic and common sense dictate that Congress should not change the tax treatment of carried interest.  If the tax is included in the reconciliation package, it would push the economic recovery off track, punish the long-term investment that has provided millions of jobs across the country and hundreds of billions of dollars in tax revenue, and cause harm to entrepreneurs, business owners, and pension funds. 

Taxpayers should not be fooled by claims that this is a “wealth tax.”  As CCAGW's ad states: “This new, job-killing tax would devastate workers, Main Street businesses, and retirees.  An economic poison pill brought to you by socialist Democrats … when we can least afford it.”