New Report Finds Proposed Investment Tax Hike Would Increase the Deficit, Kill Jobs, Slow Housing Construction & Threaten American Innovation
NVCA, AIC, NAIC, SBIA & RER Speak Out Against Proposed Tax Hike on Private Investments Across America
WASHINGTON, D.C. – Today, Dr. Charles Swenson, Professor of Accounting at the University of Southern California Marshall School of Business, released a new report outlining the economic effects that proposed tax increases on carried interest capital gains would have on American workers, small businesses, and innovation. Professor Swenson delivered the following statement about his report:
“Real estate, venture capital, and private equity account for an estimated 32 million American jobs and provide annual estimated Federal tax revenues of over $376 billion. My latest report delivers the most conservative estimate of what will happen if Washington drastically increases taxes on private investment. This report is a testament to the importance of backing up policy recommendations with sound calculations and analysis before making decisions that would affect so many American workers, small businesses, and industries.”
Click here to read the full report which details how the tax increase would lead to:
- Higher Federal Deficit – Increasing taxes would result in reduced incentives for real estate, venture capital, and private equity to invest in longer-term, productive projects.Estimated net federal revenue losses could be up to $1.2 billion in the first year of implementation, increasing to as much as $12.84 billion annually after 10 years – totaling $70 billion over 10 years.
- Fewer American Jobs – Real estate, venture capital, and private equity partnerships and their portfolio companies account for an estimated 32 million American jobs. Many businesses that would normally seek private investments may be unable to find financing and fail, leading to an estimated loss of at least 1.23 million well-paying jobs for American workers.
- One of the Highest Investment Tax Rates in the World – Proposed carried interest capital gains tax increases would raise the U.S. investment tax rate to 40.8% – higherthan those in China, Canada, and many European countries. This undermines efforts to make the U.S. more attractive for private investments that support American manufacturing, energy production, and housing construction.
- Less Housing Construction – The U.S. is in the midst of a housing shortage, with an estimated 5.5 million new housing unitsneeded to keep up with demand. Raising taxes on real estate investments will further discourage development in a crucial sector that impacts every American.
- Less American Innovation – Increasing carried interest capital gains tax rates to ordinary income tax rates removes the existing tax incentive alignment between entrepreneurs, venture capitalists, and limited partner investors to make longer-term high-risk investments. Venture firms would likely switch to less risky investments – which will decrease innovation, particularly in the high tech and bio-tech industries.
- Lost Retirement Earnings – Private investments deliver the strongest returns for public pensions and strengthen retirement savings for more than 34 million public workers.Public pension funds supporting retirees could lose up to $520 million annually since they would be forced to shift into lower-yielding investments.
Please see here for a one-pager overview of the report’s findings.
Industry leaders reiterated the report’s findings and warned of the harmful economic consequences of increasing taxes on productive, job-supporting investment:
Jeff DeBoer, President and CEO of the Real Estate Round Table: “Most commercial real estate in the US is owned through partnerships that range in size from two individuals to hundreds of people. They typically provide a ‘carried interest’ to align the financial interests of general partners with those of limited partners, and to recognize the value that general partners add and substantial risks they take. After limited partners receive their agreed share of the capital gain, the general partner receives their share of the remaining profit. The new study by Professor Swenson is further evidence that recharacterizing this long term ‘carried interest’ capital gain as ordinary income would penalize entrepreneurs, slow housing production, and reduce investment in long-neglected neighborhoods. Construction costs and the risks of real estate development continue to rise and financing remains challenging. Now is not the time to raise taxes on U.S. real estate.”
Bobby Franklin, President and CEO of the National Venture Capital Association: “Venture capital drives American innovation in cutting-edge technologies that strengthen national defense, improve health outcomes, expand financial inclusion, and much more. This report makes clear what’s at stake in the tax debate–not just for investors, but for millions of workers, entrepreneurs, and communities across the country. Washington should preserve policies that encourage long-term investment and innovation–-not pursue changes that would make it harder for VCs to take risks and build the next generation of American startups.”
Drew Maloney, President and CEO of the American Investment Council: “A tax hike on private investment will increase the deficit, destroy jobs, and hurt economic growth. An over 40.8% rate will also be one of the highest in the world – putting us behind China, Canada, and Europe. We urge policymakers to stay the course on President Trump’s historic 2017 tax law, which struck the right balance on carried interest capital gains treatment and encouraged long-term local investment, innovation, and economic growth.”
Bob Greene, President and CEO of the National Association of Investment Companies: “The proposed carried interest tax changes will disproportionately burden small and emerging private equity, venture capital, and real estate firms, limiting their ability to attract investments and sustain operations. It will lead to a reduction in jobs and innovation in critical industries that are essential contributors to the U.S. economy and further diminish opportunities for entrepreneurs from historically underfunded communities.”
Brett Palmer, President of the Small Business Investor Alliance: “This study reinforces what small business investors have long understood — carried interest is a key mechanism that channels capital into growing businesses and job creation. Changes to its tax treatment could make it harder for entrepreneurs and small businesses to access the funding they need to expand, innovate, and hire more workers. If we want a strong economy, we need policies that encourage investment in small businesses, not ones that create new barriers to growth.”
Background:
Carried interest capital gains are a longstanding component of partnership tax law, dating back to the inception of the income tax, and are designed to incentivize long-term, productive investments in American businesses. President Trump’s 2017 Tax Cuts and Jobs Act (TCJA) extended the hold time for assets from one to three years for an investment to be taxed at the long-term capital gains rate. This pro-growth policy has strengthened long-term investment in America and led the private equity industry to further invest over $5.6 trillion in the American economy – backing over 39,000 small businesses.
