Tax ‘collateral damage’ warning from US business group

A new tax on carried interest would be ‘a lot bigger than just private equity’, according to Phillips Hinch, a tax specialist with the US Chamber of Commerce, which recently released the second half of its study on proposed policy changes to carried interest taxation. Hinch tells PEO why the chamber opposes a change to carried-interest tax policy.

A bill that would increase taxes on fund managers by $48 billion (€34 billion), characterised by its author as “the most comprehensive overhaul of the US tax code introduced since the Tax Reform act of 1986”, was recently passed by the US House of Representatives, and will now be debated in the Senate.

The bill’s effects would reverberate well beyond financial service partnerships, says Phillips Hinch, tax specialist with the US Chamber of Commerce, which is the world’s largest business organisation, representing more than 3 million businesses.

The level of understanding – once you get off the tax writing committees – is still pretty low.

Phillips Hinch

“One reason we got involved with this issue is that from the Chamber’s point of view, this is a lot bigger than just private equity and hedge funds,” Hinch told PEO. “I think everyone’s talking points that’s been pushing this on the Hill has really been that this is sort of narrowly tailored. I think this is sort of an attempt to go after a small group but it really has a lot of collateral damage.”

Partnerships are prevalent in all sectors of the economy, from real estate to retail, he said.

“In 2005, there were 16.2 million people in partnerships, and I think the [carried interest] conversation has been centred on a few people’s birthday parties and that sort of issue, and we’re leaving out the other 16 million people,” Hinch said.

The Chamber recently released the second part of its study on carried interest, which found that increasing the tax on carry would have damaging effects on the economy, including lowering stock prices, property values and private company values. As a result, the Chamber is opposing the House bill and lobbying Congress to do the same.

Introduced by House Ways and Means Committee chairman Charles Rangel, the bill proposes to counterbalance the $48 billion in tax revenue that would be lost from repealing the Alternative Minimum Tax act by increasing taxes for the alternative investment industries. It would cause carried interest to lose its capital gains tax treatment, a rate of 15 percent, and be taxed as ordinary income at a rate as high as 35 percent. Rangel said raising the tax on carry would generate $25.7 billion in a 10-year period. The bill also would force hedge fund managers to pay tax on any compensation deferred to offshore bank accounts.

The US Chamber of Commerce has joined the growing number of groups lobbying against changes to carried interest taxation.

“We’re going door to door, knocking,” Hinch said. “We’ve started with people on the committee for Ways and Means, branched out to the financial services committees and worked our way through Congress.”

The Chamber’s primary goal at this point, he said, is to educate lawmakers on the issue.

“The level of understanding – once you get off the tax writing committees – is still pretty low,” Hinch said. “On the Hill, as you probably know, no one really focuses on anything until maybe a week before the vote, if they get warning.”

Thus far, the Chamber feels its education campaign has been successful.

“Generally when we bring numbers to people’s attention like 16.2 million [people in partnerships], they’re like ‘Oh, wow, this is something bigger than I thought.’”

The Chamber is now waiting to see what happens to the bill in the Senate, but expects it won’t pass with the carried interest provision, he said.

“But I think the clock restarts probably in January with the new Congress,” he said, adding that targeting financial service partnerships seems to be in vogue for legislators looking to raise tax revenues.