Venture capital and private equity have made significant leaps forward to advance diversity and expand equity. Yet as our industries strive to close the racial wealth gap, a short-sighted proposal in Congress is threatening to undermine our progress.
For more than one hundred years, carried interest has been taxed as long-term capital gains and entrepreneurs have relied on this to build their businesses and reinvest in their communities. Eliminating carried interest (or functionally eliminating it by adding conditions that are impossible to satisfy) would hamper these business owners and entrepreneurs, many of whom are first-time founders of color, preventing them from achieving the same wealth and opportunities afforded to previous generations.
Carried interest is appropriately taxed as long-term capital gains because it carries with it risk that investors must take on when they invest in these businesses. It is a win-win, as this helps further ideas and start-ups, giving them access to capital and expertise they might not have had otherwise. Under the misguided proposal being considered by Congressional leaders, carried interest could not be realized until at least five years after “substantially all” of a fund is invested. This may not sound like a significant change from the current three-year holding period, but it would impose a litany of additional conditions and constraints. Among them, firms would no longer be permitted to add new partners to existing investments without triggering a tax penalty – a huge blow to efforts to promote diversity and equity within the industry.
A common misconception about carried interest is that it only impacts Wall Street billionaires who need to pay their fair share. This is simply not true. The reality is carried interest is an incentive tool for women and diverse-owned firms to partner with investors and focus on overlooked businesses and individuals. By punitively raising taxes on carried interest, Congress would be punishing the very individuals who are trying to help start or sustain investments in communities that need it most. The consequences of changing these taxes would be felt most by entrepreneurs who lack capital and wealth but possess the knowledge and necessary skills to grow their businesses.
We cannot allow Congress to introduce barriers that would slow our hard-fought progress. Here in Wisconsin, Northwestern Mutual is among many companies that have joined in a commitment to advancing diversity, equity and inclusion. This summer they announced a $100-million impact investing fund focused solely on Black and African American communities both nationally and locally. Countless other news stories and announcements nationally have demonstrated similar progress made by venture capital and private equity funds to increase diversity amongst their ranks and to increase capital allocated to emerging fund managers and diverse communities. In fact, funding for Black entrepreneurs increased by four times through the first half of 2021 compared to last year.
Congress must embrace the momentum and create legislation that encourages investment in our next generation, our diverse communities, and our entrepreneurs. We call upon our legislators to only accept legislation that lifts diverse entrepreneurs, instead of contributing to the barriers that threaten to hold us back.
