I once heard a comparison that has stuck with me for many years. The Bible has roughly 1,200 pages in it. The U.S. Tax Code has more than 4 million pages. Why? Well, as the punchline goes, God didn’t have to worry about an IRS auditor.
We are less than two months away from selecting the 44th president of the United States. With that election, we will impart onto one person the immense power to impact the lives of each and every American via policies, rules, regulations, and legislative agendas. The scope and dimension of the presidency has expanded exponentially over the history of our republic. Our presidents have sent our sons and daughters into battle, have negotiated economic treaties and trade deals in a global economy, and sought to guide progress and prosperity to reach all Americans.
As far as total effect is concerned, no other series of policy decisions comes close to having the degree of direct impact on each and every person in the country as those governing federal tax policy.
Both the Republican and Democratic candidates have released detailed tax plans for how they would attempt to alter the makeup of the roughly $4 trillion the federal government receives from taxpayers. There are proposals for new marginal rates on individual income, payroll taxes, estate taxes, and several business and savings-related tax proposals. Buried in these proposals will be a little-known, and widely misunderstood, discussion of something called “carried interest.”
Carried interest is a term used for the capital gain from when an equity manager — typically managing pools of resources invested by universities, charitable trusts and pension funds — realizes gains on an investment pool. It sounds like something very specific impacting just a handful of people, but make no mistake the effect of this tax rate does touch most of us. Are you one of the tens of millions of individuals with 401(k) funds? You are impacted by this tax rate. Are you one of the millions of workers with a pension or who give to a charitable foundation? You are impacted by this tax rate. Are you attending college, or a parent of a college student, and receive any form of financial assistance (scholarship, grant, loan)? You are impacted by this tax rate. Do you invest in a mutual fund or a Roth IRA because you want to have a more secure retirement? You are impacted by this tax rate.
The carried interest tax rate is misleadingly called a “loophole” by those attempting to demonize it as a way in which the rich “avoid” paying the same tax rates as ordinary workers.
This is inaccurate and deceptively masks the impact such a change would have on almost every working American. Taxing carried interest in the same fashion as wages would serve no purpose other than to discourage investment.
In addition, the negative side effects to this tax increase would not even result in a substantial increase in federal revenue.
According to an objective analysis recently released by the non-partisan Tax Foundation, taxing carried interest as ordinary income would raise tax revenues by $10 to $14 billion over a 10-year period.
Is reform of an almost 4 million-page tax code needed? Absolutely.
However, the key to advancing prosperity is not in raising tax rates on investment gains, thinking that squeezing a little more revenue for the federal government is the panacea, when the indirect consequences would be disastrous.
Every taxpaying Floridian should be encouraging both the next president, as well as our elected representatives in Congress that this tax hike is one that Florida cannot afford.
Sal Nuzzo is vice president of policy at The James Madison Institute.