Liberal New York Senator Chuck Schumer has brazenly declared that he will work with President Trump only if he stabs his fellow Republicans in the back. In an interview with CNN, the Senate Minority Leader declared "The only way we're going to work with him is if he moves completely in our direction and abandons his Republican colleagues." One area Schumer wants to work with Mr. Trump is an effort to raise taxes on the American people.
One primary target for an tax hike is called the "carried interest" provision. Veronique de Rugy explains the danger of the GOP adopting the Schumer position on the issue:
Now that Republicans are on the cusp of controlling the White House -- fortifying their control of both chambers of Congress -- you might think they wouldn't be so quick to surrender to the principles of the left. Yet that appears to be exactly what some Republicans are considering on a pair of important tax issues...
During the campaign, Trump and Hillary Clinton both pledged to raise taxes on carried interest. In a private equity firm, carried interest is a share of the profits from an investment that flows to the investment manager above and beyond the amount he or she contributes to the partnership. Back in 2007, the Cato Institute's Chris Edwards noted that carried interest "is typically 20 percent of fund profits." Often times this is referred to as a loophole because it is taxed as capital gains as opposed to ordinary income.
But the truth is that it's more complicated than that, as the underlying source of the income is usually capital gain that's earned as part of an investment partnership. The carried interest is merely the part of that gain allocated to the managing partner. And like other capital gains, it's contingent upon a positive net return on the investment.
Edwards illustrated that point with this example: "So let's say a fund called the Edwards Group bought a poorly managed company called Reynolds Motors for $100 million, then turned the company around with better management, and sold it a few years later for $200 million. The $100 million of capital gain on the sale would flow through to both the limited partners and the general partner, who receives a 20 percent share. The return to both types of partners is taxed at the 15 percent federal capital gains rate, because indeed the underlying transaction generated a capital gain." Today capital gains are taxed at 20 percent, with an Affordable Care Act surtax of 3.8 percent, but the example still stands....
No matter how one defines carried interest, it's harmful to raise taxes on anyone, including important investments that help grow companies and help the American economy become more dynamic and efficient. Republicans need to remember that the left's goal is not fairness but higher taxes. Treating carried interest as ordinary income for tax purposes would simply be the first step toward higher taxes on capital in general. That would be bad for economic growth and for our wallets."
De Rugy and Edwards are correct. A tax increase on investment capital would destroy jobs and grow government. Mr. Trump should not, as Sen. Schumer suggests, abandon the GOP on this core issue.
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