Kudos to Rep. Brady for preserving investment incentives in tax bill

The Tax Cut and Jobs Act, which passed the House Thursday, has been a long time coming.

After years of promising to reduce the tax burden on families and business, it appears the GOP is making good on their commitment. There will be a bumpy road ahead to ensure the package becomes law but, at least for now, tax reform has real momentum.

Crafted by House Ways and Means Committee Chairman Kevin Brady (R-Texas), the bill may help families by potentially lowering the individual tax rates for low- and middle-income Americans.

{mosads}For small business, the legislation reduces the tax rate to no more than 25 percent, the lowest tax rate on small business income since 1945.

In what promises to be a major boost to the economy, the bill reduces the corporate tax rate to 20 percent, making America competitive again against countries throughout the world. This is the largest corporate tax reduction in American history. 

Families earning about $4,900 per month (or less) will receive a $1,182 tax cut and, according to a study by the Council of Economic Advisors, reduction of the corporate tax rate to 20 percent will boost average household income by over $4,000.

Rep. Brady also deserves credit for preserving incentives for investing in America. Over the past few years, we have heard demands that investment taxes be increased. Some have proposed doubling them. On the campaign trail, Hillary Clinton would denounce the so-called “carried interest” provisions of the tax code as a loophole.

As a candidate, Donald Trump expressed concern that the provision was helping hedge fund managers. Brady has adopted a holding period on carried interest, which keeps taxes low while weeding out abusers. 

Carried interest is the reward paid to partners of fund managers (or general managers) for the sale of an investment, property or capital asset past the expected performance.

Take, for example, the selling of a stock portfolio: The fund manager promises his client to create a 20-percent increase on their client’s money within, say, a five-year timeline. Five years pass, and the fund manager not only increases the value of his or her client’s investment by 20 percent, but doubles it to 40 percent.

Using carried interest, the fund manager is rewarded a percentage of the gains on the investment (the usual case is 20 percent of all earnings past the agreed upon point).

As a result of his or her success, the fund manager is rewarded in the profits from the sale of the capital asset, stock or investment — just like the investors.

Tax-raising proponents argues that taxing partners this way somehow cheats the system. It doesn’t. The idea of carried investment is the “sweat equity” attributed to fund managers and investors who invest in the long-term future of building businesses and buying property.

They are earning money on capital gains, not a service. Rep. Brady’s holding period proposal preserves low taxes while addressing President Trump’s concerns of abuse.

We are one step closer to making America more competitive, more productive and more prosperous. One can only hope that the Republican majority in the Senate, under the stewardship of Senate Finance Committee Chairman Orrin Hatch (R-Utah) can deliver as well.

Andrew Langer is president of the Institute for Liberty, an organization that advocates for limited government and free-market economics.