Congress is currently working on a bill that extends popular tax credits and unemployment benefits to help combat the effects of the poor economy. Sen. Max Baucus (D-MT) and Rep. Sanders Levin (D-MI) have designed a series of offsets to pay for part of the bill; one of these is a change in the way carried interest is taxed.
Carried interest is “the share of profits that investors pay to compensate certain people for managing their money.” Currently, investment managers who receive carried interest are taxed “at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay.” Here’s an illustration by MoveOn of the impact of the loophole:
Levin and Baucus are proposing that their carried interest be subject to normal income tax rates. Politico reports today that lobbyists for the venture capital and private equity industries have “worked hard” in the past few weeks, making the case that requiring wealthy investment managers to pay the same income tax rate as the rest of us is a “danger to minorities, academics, pensioners, economically depressed Michigan, ‘the average American home,’ the fight against cancer and jobs”:
The venture capital and private equity lobbies have worked hard in the past few weeks to claim that raising the tax rate on executive compensation is less about the executives than it is about the danger to minorities, academics, pensioners, economically depressed Michigan, “the average American home,” the fight against cancer and jobs.
The fight-against-cancer argument comes courtesy of 28 scientists — “members of the U.S. academic and research community,” according to a letter to President Barack Obama — who, while thanking him for increasing grant money for medical research, warned that the tax measure could cut into the funding they get for long-term research from venture capital.
The lobbyists’ claim is ridiculous on its face. While it’s true that various working-class Americans, including the beneficiaries of cancer research, receive venture capital funds for their activities, the Levin effort does not target the investors in venture capital and private equity funds but rather the fund managers, who typically pay lower tax rates than teachers.
As Citizens for Tax Justice notes, “The venture capital industry is lobbying for a carve-out from the carried interest provision. They point out they foster small business, encourage innovation, and create jobs, so we don’t want this type of investment to dry up. It’s a tempting argument, but try to see through the smoke. The change affects only the managers of venture capital funds. It doesn’t change how the investors are taxed. The managers will take home less cash, but they still have plenty of incentive to work hard and make the fund successful — remember that 20 percent interest they get, plus the 2 percent management fee.”