Clinton and Bush tax hikes would be harmful to Iowans

An issue has emerged on the 2016 campaign trail that is uniting a group of politicians as ideologically diverse as Jeb Bush and Hillary Clinton. The subject creating such odd bedfellows is the taxation of investment income earned by private equity managers, commonly referred to as carried interest, and whether it should be taxed at a higher rate.

Populist calls to raise taxes on carried interest can make for good politics, playing to the anti-Wall Street sentiment prevalent across the political spectrum. However, in practice, raising tax rates on carried interest would be harmful to the Iowa economy and retirees in particular.

Not being discussed amid the demonization of 'hedge fund guys” is the fact that raising taxes on these investment partnerships will end up hurting Iowa's retirees, colleges, and charities. Ryan Ellis, director of tax policy at Americans for Tax Reform, explained in a recent Forbes column that a tax hike on carried interest 'almost certainly will trickle down to middle class families who are sending their kids to school, drawing from a traditional pension, or benefiting from a charitable endeavor.” 'It goes without saying,” adds Ellis, 'that small firms looking for investors also will take a hit.”

The industry being targeted by this latest tax hike fad is important to the Iowa economy. Private equity firms have invested over $15 billion in Iowa from 2005-2014, with over 2 billion invested last year alone. A tax hike on carried interest would hurt the approximately 113 privately equity-backed companies headquartered in Iowa, who employ over 19,000 people.

Investment income is already taxed too heavily. As it stands, the U.S. imposes the 6th-highest capital gains tax among the 34 developed nations of the Organization for Economic Co-operation and Development (OECD). After the historically sluggish economic recovery of recent years, it would be unwise to raise taxes on carried interest. It's well documented that higher taxes on investment income slow economic growth. As Chuck DeVore, vice president of policy at the Texas Public Policy Foundation, recently wrote, 'increasing taxes on carried interest is simply taxing capital gains as labor income, acting to reduce work and profits that generate economic activity.”

DeVore, who served as vice chairman of the California State Assembly's Committee on Revenue & Taxation, notes that raising taxes on carried interest, though it might make for a good campaign sound bite, ultimately means 'less investment and consequently, fewer jobs, less innovation, and less prosperity.”

A tax hike on carried interest would be bad for the health of Iowa's public pension system. Both the Iowa Public Employees' Retirement System & the Iowa Municipal Fire and Police Retirement System have substantial investments in private equity. A tax hike on carried interest would ultimately take a bite out of retirement plans of the more than 260,000 Iowa public pension recipients.

Taxing investment income at the same rate as wage income has long been a goal of progressives in Congress. Note that those calling for tax parity never want to achieve it by reducing taxes on wage income, as the real goal is not just tax parody, but more revenue for government to spend. Yet when it comes to generating revenue, raising taxes on carried interest is a poor approach. The proposed tax increase on carried interest, though it would cause much economic damage, would bring in very little money for the federal treasury: generating $1.5 billion annually when total tax collections are $3.5 trillion per year.

Pretending carried interest is not investment income and taxing it as wage income would significant step down the slippery slope toward taxing all investment income at the same onerous rates faced by wage income. Despite the enticing politics, lawmakers and candidates would be wise to avoid joining the chorus calling for a tax hike on carried interest.

' Don Racheter is president of the Public Interest Institute, a free market think tank based in Mount Pleasant, Iowa. Patrick Gleason is director of state affairs at Americans for Tax Reform, a non-profit advocacy organization based in Washington, D.C. Comments: racheter@limitedgovernment.org; (319) 385-3462