We'll All Feel the Negative Effects of Higher Investment Taxes

As Congress begins consideration of the tax bill, Congressional tax writers should take note of a new study showing the damaging economic effects of proposed tax increases on carried interest capital gains income.

The report details how a higher tax rate on long term private investment would kill American jobs, slow housing construction, and end up hurting working families, small businesses, and American innovation.

The new study was done by Dr. Charles Swanson, Professor of Accounting at the University of Southern California Marshall School of Business, and it offers a conservative estimate of the potential impact of the proposed tax increase on carried interest capital gains.

The report describes how real estate, venture capital, and private equity investors account for an estimated 32 million American jobs and provide annual estimated federal tax revenue of over $376 billion. The proposal to nearly double the U.S. investment tax rate would immediately discourage private investment across the U.S. economy, from American manufacturing to energy and to real estate.

According to the study, the higher tax rate would reduce investment in startups and small businesses and result in the loss of at least 1.23 million American jobs. The higher rate on real estate investment would mean less housing construction. The tax increase would reduce incentives for entrepreneurs and venture capital firms to make high-risk investments, chilling the growth of American innovation. Public pension funds would see lower retirement earnings as they move out of private equity investments. 

The proposed tax increase would raise the U.S. investment tax rate to 40.8%, higher than those in China, Canada, and most European countries. In fact, the U.S. rate would be twice as high as China’s investment tax rate.

Senators Bernie Sanders and Elizabeth Warren support this tax increase on long term investment, as do most House Democrats. Congressional Republicans should not support this tax increase. House Financial Services Committee Chairman French Hill supports keeping the current carried interest tax rate, saying “it is good for the country” in terms of jobs and long term investment incentives. Texas Congressman August Pfluger notes that “we are energy dominant because of provisions like carried interest.”

As the report shows, the negative impact of higher taxes on carried interest would be widespread. Private equity and venture capital investments in manufacturing, small businesses, and technology would be reduced. Investment in critical sectors such as infrastructure, AI, and biotech would be affected.

A higher tax rate would distort investment incentives, discouraging the investments we need to increase American innovation. It would discourage private investment throughout the economy, reducing jobs and slowing economic growth. This report shows that increasing the tax rate on carried interest is a bad idea, and should be rejected by Congress.