The latest brilliant idea to raise taxes “on the rich” targets so-called “private equity partnerships,” including hedge funds, and aims to take away their ability for profits to be taxed as investment gains instead of as regular income. This sounds plausible on the surface, as if they are “eliminating a loophole,” when in fact it’s just the same old tax on business. Ken Blackwell at Townhall.com:
Always hungry for more money to spend on pet projects, spendthrift members of Congress have found new taxable cash cows to fillet — private equity funds, partnerships, venture capitalists, and hedge funds. Foolishly, they have opted to fillet these cows for a month’s worth of steak instead of milking them for economic nutrition for years.
Specifically, the members of Congress have placed a 130% tax increase bullseye squarely on the backs of fund managers. These are hyper-aggressive and competitive financial managers who work hard, take risks, drive innovation, and earn tens of millions of dollars on a single completed deal.
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The funds these individuals have made so profitable have an enormously positive impact on the U.S. economy and Main Street America. Ham-handedly tinkering with such an important capital driver will have a negative impact on the nation’s economic vitality.
In the past two decades, these funds have yielded returns in the hundreds of billions — benefiting a wide array of individuals and projects. From constructing shopping malls, office buildings, and hotels to funding pensions for teachers, firefighters, and police officers, the funds’ capital investments have substantially contributed to job creation and improvement in the quality of life many Americans enjoy.
Read the rest at the above link. Somehow, I just know the fellow who cut open the Goose That Laid The Golden Eggs was a politician.
Today’s Wall Street Journal editorialized on the effort by Senators Grassley and Baucus to push this hike through:
The tax “loophole” they want to close is a 1987 law that allows certain publicly traded partnerships to pay a capital gains tax rate (now 15%) on investment earnings rather than the corporate income tax rate (now 35%). That law lets corporations that earn at least 90% of their income from investments (“passive income”) pay the lower tax rate. Mr. Grassley, the Iowa Republican, now calls that “unfair.”
But wait. It turns out he’s a cheerleader for this same loophole as long as it applies to his favorite industry: corn-based ethanol. On June 29, the Iowan successfully sponsored a tax provision that allows “certain income and gains” related to alternative fuels to be “treated as qualifying income for publicly traded partnerships.” His co-sponsor was none other than Mr. Baucus, the Finance Committee Chairman who is Mr. Grassley’s running mate in closing the private equity “loophole.”
Apparently some partnerships are more equal than others.
Sorry, most of this article is behind a subscription wall.
The unlikely hero in this fight may be Chuck Schumer. The New York Senator, whose constituents number among the hardest hit if the tax increase passes, challenged the corn state Senators to apply the higher rate to all partnerships. Because this will affect substantially more people, it makes it almost impossible to pass.
It’s a true pleasure to see Senator Schumer recognizing his wealthy constituents don’t deserve to be penalized for their success. I hope he will soon extend that thinking to the rest of us, too.
The reason the lower rate applied to these partnerships in the first place is that the corporations they own already pay the regular corporate income tax on profits, and shareholders pay again on dividends when profits are distributed. The politicians want to tax the same income at a higher rate the third time around.
By increasing the taxes on investments, the return is reduced, and thereby the attractiveness to investors. This would have a profound and lasting effect on our economy, raising the cost of capital and giving our best money men a strong incentive to ply their trade internationally, since few other countries tax their corporations and investors as punitively as the United States.
It’s just an all-around bad idea – unless you’re a corn state Senator in the pocket of Archer Daniels Midland.