Tax increases have taken centre stage in the debt ceiling negotiations between the US Congress and President Barack Obama. While Republican members of congress have typically been opposed to raising the tax on carried interest, two Democrats have broken ranks with their party and come out against hiking the tax rate on carried interest.
Jared Polis and Mike Quigley, Democrats from Colorado and Illinois, respectively, wrote a letter to Obama last week strongly opposing raising the carried interest tax.
“We appreciate the work that you are doing to reach a compromise on the debt ceiling discussions and we applaud you for your willingness to tackle difficult issues during these talks,” the Congressmen wrote. “However, we are very concerned about the discussion on increasing the tax on carried interest as a way to raise revenue. Such a tax increase would not only damage our already fragile economic recovery, but it would also cripple the spirit of innovation and entrepreneurship that makes our country so strong.”
The debate over carried interest taxes has raged over the past few years. Democrats have furthered the debate citing a carried interest hike as a way to address the deficit.
However, Polis and Quigley argue that while some members of Congress try to characterise a tax increase on carried interest as merely closing a loophole, the tax code provision was created to encourage long-term investment and job creation.
“We feel very strongly that the current capital gains tax treatment of carried interest is vital to the continued economic recovery of Main Street,” according to the letter.
A tax increase on carried interest could also devastate other areas of our economy, including the real estate market, the Congressmen wrote.
“For instance, the commercial real estate market, which already faces a crisis, would see the cost of long term investment rise to prohibitive levels,” according to the letter. “A collapse in the CRE market would devastate our hopes for economic recovery…”
Last month, Obama took direct aim at private fund managers, directing congress to place a carried interest tax hike firmly on the table.
“If you are a wealthy CEO or a hedge fund manager in America right now, your taxes are lower than they have ever been,” said Obama in a televised news conference on 28 June. “They’re lower than they’ve been since the 1950s. And you can afford it. You’ll still be able to ride on your corporate jet; you’re just going to have to pay a little more.”
Obama’s latest statement comes on the heels of his mention of carried interest in his 2012 budget proposal. In April, Obama unveiled his proposal, which directs the US Congress to require executives of private equity firms to pay ordinary income tax rates as high as 35 percent (39.6 percent after 2012) on the profits they receive as compensation. Carried interest currently qualifies for lower capital gains tax rates of 15 percent (20 percent after 2012).