One of the many tax hikes being pursued by Washington would be “absolutely horrific” for small businesses and partnerships, which create a majority of the nations jobs, according to a money expert.
The verdict is from John Berlau, a senior fellow at the Competitive Enterprise Institue, who has written about the impact of public policy on entrepreneurship and the investing public for the Wall Street Journal, New York Times and others.
Now, at OpenMarket.org, he warns that the proposed change would affect how the government looks at increased value – capital gains – accumulated by partnerships.
In short, the IRS would start assessing taxes on capital gains as if they increased value to a company as ordinary income. The IRS would even charge payroll taxes based on those figures. Previously, such income was taxed at a separate capital gains rate.
“The carried interest tax hike, whether proposed by [Rep. Dave] Camp or [Barack] Obama is in a category by itself as absolutely horrific,” he said.
“In reality, such a tax increase would be a direct attack on the structure of partnerships that are used by innovative businesses – from small firms to venture capital and ‘angel investor’ groups – that take risks and make an outsized contribution to economic growth and job creation,” Berlau wrote.
“This would … triple the taxation of a good portion of earnings for small business and entrepreneurs,” he said.
Berlau, who was an award-winning financial and political journalist before joining CEI, and has been cited in Bloomberg, Financial Times and the Washington Post, said Obama has proposed the changes and has called it “closing loopholes.”
“Upon closer examination, these ‘loophole closures’ are actually tax hikes that will hit Main Street the hardest,” he said.
But he noted that this year, the House Ways and Means Committee chairman, Camp, has “unfortunately signed onto some of these destructive proposals.”
The language to address “carried interest” is similar from both Obama and Camp, he said.
Under the proposals “much of the capital gains of partnerships” would be taxed “as ordinary income as well as subject … to hefty payroll taxes for Medicare and Social Security.”
Berlau noted that Camp himself warned, in 2010, that such a move would “discourage the entrepreneurial risk-taking that is crucial to economic growth and job creation.”
“There is no asset or income threshold in Camp’s bill or past Obama budgets, so firms from venture capital houses to doctors’ offices to family farms, all of which are often structured as partnerships, could be negatively affected,” he wrote.
“In a partnership – from hedge funds to venture capital to small business – the partners are taxed on a business’s earnings at individual tax rates, instead of the business itself being taxed at corporate rates and then doubly taxed on any dividends it pays out. In many partnerships, some partners get bigger stakes in the company because of the services they perform, in addition to the capital they have contributed. This is called the ‘carried interest,’” he wrote.
The impact would be direct, he noted.
“According to the National Venture Capital Association, ‘By more than doubling the taxes paid by venture capitalists on carried interest, Congress would be upending the risk/reward balance and creating serious economic consequences for very little revenue,’” he said.
“Small business folks and innovative entrepreneurs who structure their firms as partnerships will be hindered by both the cost and complexity of Obama and Camp’s provisions aimed at ‘Wall Street’ fat cats,” he said.