One of the simmering issues before Congress as they begin the long and arduous task of reforming our tax system centers on a provision often referred to as “carried interest.” As so often is the case in Washington, the chattering class often elicits more heat than light when discussing the issue, but it is certainly worth a more thorough examination.
Carried interest is essentially the same as the capital gains tax rate. When partnerships and investment vehicles make profit, the share of the proceeds are distributed and treated as capital gains for purposes of taxation. For some who appear to care more about politics than economics, this is an outrage, a giveaway to the rich and a “loophole” that must be closed.
{mosads}Capital gains taxes are taxed at a lower rate than income for two reasons.
The first is simple: capital gains taxes are essentially a form of double taxation. Corporations that pay dividends must pay income taxes first on any profit. Then money paid out as dividend income is taxed again as capital gains. Each dollar of dividend income was taxed twice, once at the corporate level and again at the individual level.
The second one stems from the fact that economists have long argued that a reduced capital gains tax create provides the right benefits to the economy. It encourages investment and investment fuels economic growth.
Today many on the left, first by targeting “carried Interest” and then by attacking the capital gains tax rates, argue that capital gains and income should be taxed at the same rate. Rather than suggesting that the income tax should be reduced in line with the capital gains rate, they argue the capital gains rate should be increased massively as part of the income tax rate.
While serving in the House of Representatives, Oregon Sen. Ron Wyden was a champion of reducing capital gains taxes, recognizing that it was critical for the “economic future of my state.” Yet late last week, Wyden ran in the other direction. Speaking before the liberal Tax Policy Center, Wyden acknowledged that carried interest is capital gains but derided the capital gains rate as a “shelter.” Such a radical increase in capital gains taxes would damage American investment, prosperity and certainly harm the economic interests of his home state of Oregon.
A better solution would be to make corporate and individual tax rates the same as the current 23.8 percent capital gains rate. That reduction across the board would boost the American economy like we haven’t see in a generation.
American corporations (and hence American consumers) already pay the highest corporate tax rates in the world. That puts us at a competitive disadvantage to our foreign competitors. An across the board tax cut, similar to that proposed by President Trump, would increase investment, spending and savings.
But we should at least credit Wyden for recognizing that carried interest is not a “Wall Street loophole.” An argument can be made for making capital gains taxes the same as income, but that should not be an excuse to increase taxes. In the current political climate, it should be an opportunity to reduce them.
Andrew Langer is president of the Institute for Liberty, a conservative public policy advocacy organization.
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