Rep. Hudson to Kevin Brady: Real Tax Reform Doesn’t Increase Investment Taxes

It’s almost an everyday occurrence to go on your phone or computer and see protesters with signs demanding that the government “Tax the Rich.” Tax reform that focuses on punishing successful business owners is a top priority for people looking to push the ideology of class warfare in order to advance their leftist agenda. Unfortunately, the protesters have it all wrong, many of the provisions in the tax code that they claim benefit only the rich are essential tools that help grow the small businesses that provide millions of jobs for the poor and middle classes all around the United States.

While promoting their “Tax the Rich” agenda, the left loves to parade around one of their favorite whipping boys, the evil hedge fund managers and their use of carried interest. But what they don’t understand is that carried interest is not truly a tool to make rich people even richer. Carried interest has been around since the middle ages and has been responsible for creating successful, thriving societies ever since. Just as in the past when investors provided the financial backing for the merchants searching for profitable trade routes so too do modern investors help small companies gain access to the capital they need to hire employees and buy the equipment and products necessary to expand their business.

Carried interest is the original economic stimulus package — only done the right way. Rather than just spending their money, investors bankroll up-and-coming businesses that need a little help jumping to the next level of success. Of course, the investor is betting on the success of the business, and a share of the future profits, which could be many years down the line. They are also accepting the risk that the company may fail and the initial investment will be lost. Even when the company is successful the investor may need to wait years before receiving any compensation for the original investment. Without investors willing to take this risk, in the hope of a future return, our economy would stagnate with no new business development or job growth.

To compensate for the risk the investors are taking, any profit that is created is considered capital gains and is taxed at a lower rate than ordinary income. So basically, this lower tax rate is what keeps investors investing– it makes the risk of helping a business grow worth it. A recent research report conducted by the American Investment Council demonstrates the importance of private equity investments in states throughout the U.S. Texas tops the list with private equity investments of almost $80 billion dollars invested in more than 400 companies last year. Thanks in part to investors willing to invest their money, new business creation in Texas increased more than 10% over the previous year. Surely, Texas’ success due to private equity investments will serve as a great example to Chairman of the Ways and Means Committee, Rep. Kevin Brady (R-TX), and its members as they consider making any changes to the rules regarding carried interest taxation.

Last week Rep. Richard Hudson (R-NC) joined with 22 members of Congress, including some from the Freedom Caucus, in the sending of a letter written to Chairman Brady and Ranking Member Neal. In the letter Rep. Hudson makes a passionate appeal to maintain the current tax laws regarding carried interest stating “For more than a century, tax law has appropriately defined profits derived from the sale of capital assets as capital gains income. Changing that characterization as it relates to carried interest capital gains would arbitrarily punish investors in real estate, venture capital, private equity and other partnerships by treating their gains differently than those of other investors.”  Hudson also counters the argument put forth by carried interest opponents who have wrongly tried to raise taxes and “… have mis-characterized the tax on these long-term investments as a loophole. It is not. Loopholes, subsidies, and other tax expenditures distort or deviate from the normative principles of the tax code. Carried interest, on the other hand, meets all the criteria of a long-term capital gain; It is a capital gain realized from an entrepreneurial investment of expertise — in a capital asset that appreciates over more than one year. As such it should be treated as a capital gain.”

Rep. Hudson is right. Now is the time to pass a tax reform package that stimulates the economy by lowering taxes and encourages long-term investment into American businesses. And carried interest will provide the incentive to do just that.

 

 

 

 

 

 

 

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