31 10 2017

ATR Warns Against US Carried Interest Tax Increase

US lobby group Americans For Tax Reform (ATR) has raised the issue of capital gains tax, an area not covered by the Republicans' proposed Tax Plan, warning that a tax on carried interest could stifle economic growth.

In a statement released on October 25, the group praised the "numerous provisions" in the plan to improve economic growth, citing the corporate tax reduction and the new rate for pass-through entities. However, it warned that the current framework contains no provision for capital gains taxes – a potential red flag.

"Because the plan contains many other pro-growth provisions, it is not necessarily a problem that there is no reduction in the capital gains tax, given the constraints faced by budget reconciliation," said ATR. "However, increasing this tax, either through a direct increase in the rate or by narrowing the base of the tax, would limit economic growth and contradict the goals of tax reform."

According to ATR, one way that lawmakers may increase taxes on capital gains is through taxing carried interest capital gains as ordinary income, rather than capital gains income.

"This would be a mistake," warned ATR. "There is no difference between carried interest and any other type of capital gain."

Carried interest is the investor's share of an investment partnership, and income is generated through long-term investment, which should therefore be treated the same as any other capital gains, argued the group. Taxing it as ordinary income could have a detrimental impact on pension funds, charities, colleges and other institutions that rely on investment partnership structures to meet savings goals, it said.

"The better policy would be preserving the base of the capital gains tax to promote investment by maintaining current law (or reducing taxes on all capital gains)," suggested ATR.