Elizabeth Warren by Gage Skidmore
Senate Democrats led by Sen. Tammy Baldwin (D-Wis.), Sen. Bernie Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.) unveiled legislation on Thursday that would raise taxes on carried interest by arbitrarily taxing carried interest at a higher rate.
The misnamed “Carried Interest Fairness Act” would increase taxes on carried interest investment by 70 percent, increasing the tax rate from 23.8 percent up to 40.8 percent. This tax hike would end the proper tax treatment of carried interest as capital gains and instead tax carried interest as ordinary income.
Grover Norquist, President of Americans for Tax Reform, issued the following statement opposing this Democrat tax hike:
“The Left’s agenda is to tax all capital gains as ordinary income. Taxing carried interest is the opening salvo from Democrats. On Principle, carried interest should be taxed as capital gains and not at artificially higher rates.”
What is carried interest?
Carried interest is a share of profits earned by general partners of private equity, venture capital, and hedge funds. General partners in a firm are paid as if it were a return on their investment rather than ordinary income and are taxed as a capital gain as such.
Carried interest is not a “loophole.”
While the Left labels carried interest as a “loophole” it is actually based on longstanding tax principles. Raising taxes on carried interest capital gains should be rejected. It is poor tax policy that would harm economic growth, reduce jobs, and reduce the returns of public pension funds across the country.
Even former Democrat Sen. Kyrsten Sinema (D-Ariz.) rejected Democrats’ attempt to raise taxes on income from carried interest by blocking this proposal from being included in the Inflation Reduction Act.
This tax hike would hit private equity, venture capital, real estate partnerships, and their portfolio companies which together account for over 25 million American jobs. In response, firms would downsize and decrease investment, causing both a loss of jobs and a reduction in the returns investors see.
A 2021 study analyzing venture capital funds found that changing the tax treatment of carried interest “to ordinary income rates would significantly reduce the attractiveness of forming a new fund.” A higher tax rate limits the availability of affordable investment options for American workers and retirees.
Americans for Tax Reform oppose the misnamed “Carried Interest Fairness Act” and encourages lawmakers to reject this bill.
