Obama Tax Proposal Would Hurt Investment

March 19, 2014

A proposal from President Obama to tax investment returns would simply disincentivize investment, says Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute.

  • The president has proposed taxing "carried interest" (certain returns on investments) as ordinary income.
  • Carried interest is a net profit share that general partners receive upon the sale of a capital asset.
  • Carried interest from long-term capital gains in partnerships has traditionally been taxed at long-term capital gains rate, but the proposal would tax it as ordinary income instead.
  • This would mean that the top rate would rise from 23.8 percent to 43 percent.

This would bring in $14 billion in revenue over a decade, but economic activity would suffer.

  • American partnerships -- whether in real estate, venture capital, private equity or elsewhere -- would be at a major disadvantage compared to their international peers, meaning that investment capital would likely move abroad.
  • Private companies, innovators and small start-up firms -- the businesses that typically need the most capital -- would struggle to get financing.
  • Moreover, two investment partnerships would face very different tax rates when they sell their assets, simply based on the fact that one had interest income and the other did not.

President Obama says that carried interest is much more like wage income than a capital gain, his rationale for taxing it at ordinary rates. But the very point of capital gains treatment is to encourage investment, and it makes no sense to tax investment partnerships differently than partnerships that own car dealerships or ice cream shops.

Obama is proposing the tax increase in order to appear fiscally responsible as he continues to spend. If he wants to be fiscally responsible, he should cut green job programs or sell assets, but raising taxes on one of the most competitive sectors of the U.S. economy is not the way to go.

Source: Diana Furchtgott-Roth, "Taxing Carried Interest Discourages Investment," MarketWatch, March 7, 2014.

 

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