New carried interest tax could cost 4.9m jobs: US Chamber of Commerce

The report predicts the tax could see the PE/VC industry shrink by nearly 20%, with failures of many PE and venture-backed firms.

A US Chamber of Commerce study predicts dire consequences if a proposed carried interest tax increase passes in Congress.

In a report released September 7 by the Chamber’s Center for Capital Markets Competitiveness, entitled Impact On Jobs, Tax Revenue and Economic Growth of Proposed Tax Increase on Carried Interest, Charles Swenson, accounting professor at the University of Southern California, detailed how a proposed 98 percent tax increase on capital gains would reduce investment, lead to widespread job losses, and decrease federal, state and local tax revenue.

The current American Families Plan, as part of the 2022 federal budget, proposes treating carried interest as ordinary income tax for those who make more than $400,000 per year starting in 2022.

Swenson noted in the report that the resulting downsizing seemed to be “at odds with the policy objectives of the [Biden administration’s] Build Back Better agenda, including investment in renewables, and infrastructure, assisting with covid-19 recovery and promoting job creation.”

Swenson estimated in the report that, if enacted, the proposed carried interest taxes would in five years eliminate 4.9 million jobs across the US. By year five, federal, state, and local tax revenues could drop by $96 billion annually. Worse, pension funds could lose up to $3 billion annually, resulting in lost retirement earnings, and pension fund losses that may force state and local governments to try to make up, he said.

Tom Quaadman, executive vice-president of the US Chamber Center for Capital Markets Competitiveness said that “new carried interest taxes would harm the innovators who are leading America out of the pandemic and the main street businesses that are fueling the economic recovery.”

The report noted that the three main industries most affected by the increased tax charges on carried interest are private equity, venture capital and real estate. These firms, with their portfolio companies, are responsible for 25 million American jobs and over $493 billion in estimated annual federal state and local tax revenues, the report said.

At the industry level, private equity would be hit hardest by the tax increase, the report projected. Private fund firms would lose 3.15 million jobs, and $58.5 billion contributed to federal, state, and local tax revenues. Real estate firms would lose 1.8 million jobs, and $38 billion in combined tax revenue, the report estimated.

The report notes that the current proposed tax change would be “so impactful” that it would eliminate over 3 percent of the country’s workforce. Applying “standard economic theory,” the report predicts an up-to 19.55 percent downsizing of the private equity, venture capital and taxable partnership-based real estate industries, with failures of many PE- and venture-backed firms. The tax increases would also act as a disincentive both in the labor force and in capital formation, the report concluded.

Professor Swenson could not be reached for comment.