The Enterprise Value Tax: Another Misbegotten Job Killer
December 7, 2011
President Obama's Plan for Economic Growth and Deficit Reduction contains a provision that would tax, as ordinary income rather than capital gains, the net proceeds from the sale of what is deemed an "investment services partnership interest"(ISPI). An ISPI is any interest in an investment partnership that is acquired by a person as a result of activities involving the purchase and sale of certain "specified assets," defined to include partnership interests, securities and real estate holdings. This provision, which is labeled as the "Enterprise Value Tax" (EVT), would force certain partnerships to pay ordinary income tax on the sale of any part of their business, say researcher David G. Tuerck, Paul Bachman and Frank Conte.
Although publicly touted as a tax on financial firms, the EVT will have broad sweeping impact on other industries such as natural resources, real estate and many other businesses. The EVT represents an important departure from current law. Under current law, most of the profits from the sale of investment partnerships are taxed at the capital gains rate, consistent with the long-standing general rule that business interests should be treated as capital assets. The tax rate on long-term capital gains is 15 percent. The EVT would treat these same profits as ordinary income, for which the top statutory tax rate is 35 percent.
Tuerck, Bachman and Conte assess the effects of this change on the Massachusetts economy. They predict that persons who reside in Massachusetts will pay $611 million annually in new federal taxes under the plan. Using their State Tax Analysis Modeling Program, (STAMP), they also find that, as a result:
- The state will lose 5,400 jobs.
- Annual capital spending will fall by $9.5 million.
- Residents' real disposable income, or income available for spending and saving, will fall by $673.2 million.
These results are consistent with the argument from economics that a tax on capital income discriminates against saving and risk taking.
Source: David G. Tuerck, Paul Bachman and Frank Conte, "The Enterprise Value Tax: Another Misbegotten Job Killer," Beacon Hill Institute, December 2011.
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