The Private Equity Growth Capital Council (PEGCC) is fighting the industry’s corner as US lawmakers debate comprehensive tax reform.
In two recent letters sent to the House Committee on Ways and Means, the most powerful tax-writing committee in Congress, the industry group argued there should be no change to the tax treatment of carried interest and said partnership structures should remain the same.
Written by its president and chief executive, Steve Judge, the letters argue for carried interest to continue to be taxed as a capital gain, rather than at a higher ordinary income rate, in order to reward “entrepreneurial risk-taking”.
Earlier this year Congress raised ordinary income taxes on households earning $450,000 per year and individuals earning $400,000 per year from 35 percent to 39.6 percent (40.5 percent including the healthcare tax increase under the Affordable Care Act). For those same earners, the capital gains tax rate was effectively increased to 23.8 percent from 15 percent.
The letter argues that the key criterion for deciding whether carry should be a capital gains is deciding whether an entrepreneurial investment has been made, the return for which depends entirely on the value of the asset. PEGCC argues this can be either an investment of capital or labor.
Competition concerns were also raised. Judge highlights that many other countries tax carry as a capital gains, and do so at a lower rate. Another carry tax increase could drive capital overseas, he argued.
In a separate letter Judge also addressed proposals to change the flow-through tax treatment of partnerships, limited liability companies and S Corporations. The proposals would tax larger flow-through entities as C Corporations, which are taxed according to their size.
Introducing multiple layers of taxation for flow-through entities would introduce uncertainty into the tax code, said Judge. He added that basing the tax treatment on the size of the entity would “misalign incentives” for growing businesses.
“Setting a threshold above which a flow-through enterprise would be taxed as a C Corporation creates a substantial disincentive for businesses to grow beyond a certain level at which their profits are subject to only one layer of taxation,” the letter said. “Simultaneously, such a policy would create new incentives for tax avoidance by dividing large flow-through (pass-through) entities into smaller business units that would escape double taxation.”