Op-ed: Tune out the growing tax hike chorus

Milwaukee-Wisconsin Journal Sentinel

Op-ed: Tune out the growing tax hike chorus

By Brett Healy And Patrick M. Gleason

An issue recently emerged on the 2016 campaign trail that is uniting a group of politicians as ideologically diverse as Hillary Clinton, Jeb Bush and Bernie Sanders. The topic creating such odd bedfellows is the taxation of investment income earned by private equity managers, commonly referred to as carried interest, and whether it should be taxed at a higher rate.

Populist calls to raise taxes on carried interest make for good politics, playing to the anti-Wall Street sentiment prevalent across the political spectrum. In reality, raising tax rates on carried interest would be harmful to the state economy and Wisconsin retirees in particular. As politically advantageous as it may appear, there are reasons why presidential candidates and members of Congress would be wise to resist joining Bush, Clinton, Sanders and others in jumping on the carried interest tax hike bandwagon.

Not being mentioned amid the demonization of “hedge fund guys” is the fact that raising taxes on these investment partnerships will end up hurting Wisconsin retirees, colleges and charities. Ryan Ellis, director of tax policy at Americans for Tax Reform, explained in a recent Forbes column that a tax hike on carried interest “almost certainly will trickle down to middle-class families who are sending their kids to school, drawing from a traditional pension or benefiting from a charitable endeavor.”

“It goes without saying,” adds Ellis, “that small firms looking for investors will also take a hit.”

The industry that is the target of the latest tax hike fad is important to the Wisconsin economy. Wisconsin ranks 16th in the nation in private equity investment, with private equity firms having invested approximately $68.2 billion in Wisconsin-based companies from 2005 to 2014. A tax hike on carried interest would hurt the approximately 401 privately equity-backed companies headquartered in Wisconsin, who employ over 335,570 people.

Investment income already is taxed too heavily. As it stands, the U.S. imposes the sixth-highest capital gains tax among the 34 developed nations member to the Organization for Economic Co-operation and Development (OECD). After the historically sluggish economic recovery of recent years, it would be unwise to raise taxes on carried interest. It’s well-documented that higher taxes on investment income slow economic growth. As Chuck DeVore, vice president of policy at the Texas Public Policy Foundation, recently wrote, “increasing taxes on carried interest is simply taxing capital gains as labor income, acting to reduce work and profits that generate economic activity.”

DeVore, who served as vice chairman of the California State Assembly Committee on Revenue & Taxation, notes that raising taxes on carried interest, though it might make for a good campaign sound bite, ultimately means “less investment and consequently, fewer jobs, less innovation, and less prosperity.”

A tax hike on carried interest would be detrimental to the health of Wisconsin’s public pension system. Both the State of Wisconsin Investment Board & the Milwaukee Employees’ Retirement System have substantial investments in private equity. A tax hike on carried interest ultimately would take a bite out of the retirement plans of hundreds of thousands of Wisconsin pensioners.

Taxing investment income at the same rate as wage income has long been a goal of progressives in Congress. Note that those who call for tax parity never want to achieve it by reducing taxes on wage income, as the real goal is not just tax parity, but more revenue for government. Yet when it comes to generating revenue, raising taxes on carried interest is a poor approach. The proposed tax increase on carried interest, though it would cause much economic damage, would bring in very little money for the federal treasury.

Pretending carried interest is not investment income and taxing it as wage income would be letting the camel’s nose under the tent and a significant step toward the ultimate liberal dream of raising taxes on all investment income. Republican lawmakers and candidates would be wise to avoid joining the chorus calling for a tax hike on carried interest.

Brett Healy is president of the MacIver Institute, a free market think tank based in Madison. Patrick Gleason is director of state affairs at Americans for Tax Reform.