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PEGCC response to calls for a Carried Interest tax hike

WASHINGTON – Steve Judge, the Interim President and CEO of the Private Equity Growth Capital Council offered the following statement in response to calls for a carried interest tax hike:

“Private equity is a vital source of capital, having invested nearly $150 billion in over 1,200 companies in 2010 alone. Raising taxes on this type of investment would discourage the risk-taking required to start, grow, and save companies. Anyone else who purchases a company, and makes a series of improvements over several years that increase the value of that company, would be entitled to capital gains treatment if they sold the company for a profit. That is the private equity business model.  PE firms make long-term investments in companies and if successful the profit share – known as carried interest – is properly treated as capital gains. ”

Additional background information on carried interest:

Capital gains is taxed at a lower rate to incentivize investment, entrepreneurship and risk-taking.

  • The lower tax rate on capital gains encourages risk-taking required to start, grow, and save companies.
  • The tax rate on capital gains reflects a long-standing principle of U.S. tax code:  those who take risks to invest should be rewarded.

Carried interest is a capital gain.

  • Capital gains treatment for carried interest has been enshrined in partnership tax law for over fifty years and is based on the principle that we reward those who take entrepreneurial risk, whether that risk involves investing capital or it involves investing expertise – or in the case of private equity, both.
  • Carried interest is not exclusive to private equity, but can be found in a broad range of important industries and economic sectors that utilize a partnership structure. Real estate developers, for example, typically receive carried interest in development projects for new office buildings, shopping malls, and the like. Venture capital firms and small business investment companies receive carried interest when they invest in a new start-up.
  • Carried interest is not the same as ordinary income. In the case of private equity partnerships, carried interest is an equity stake in an operating business owned for years, and carries with it the risk that the company will not generate a profit in which case the stake becomes worthless.
  • Carried interest profits are subject to a claw back.  Partners have to actually return carried interest income if their investment fund does not achieve the return target set by investors in partnership agreements.  In contrast, no one has to return their salary if they don’t do a good job.
  • To raise the tax rate on carried interest would put the U.S. at a competitive disadvantage. The countries with which we compete tax carried interest as a capital gain and at rates ranging from 0% in India, and 10% in China, to 18% in the United Kingdom.