New York City Mayor Michael Bloomberg told a D.C. audience that in addition to ending huge tax breaks and subsidies for the agricultural and energy industries, fiscal responsibility requires that “tax loopholes in the financial industry that are outdated should be closed too, such as taxing carried interest at ordinary income rates.”
“I say this even though many of the people who would be affected are my constituents. I assume I will get some phone calls later this afternoon,” Bloomberg said at an event cosponsored by the liberal Center for American Progress and conservative American Action Forum.
Current tax law treats “carried interest” – the (typically 20%) stake of a limited partnership’s net capital appreciation that is reserved for general partners – as a form of long-term capital gain, taxing such net gains at a 15% rate. In recent years, on grounds that these distributions are, in fact, a form of compensation for services rendered, Congress has explored legislation that would transition over time to treating carried interest as a form of ordinary income, thus subjecting it to a 39.6% rate. General partners’ management fees (typically 2%) already are taxed as ordinary income.
In a 2010 paper for the AAF, former Congressional Budget Office Director Douglas Holtz-Eakin noted that, if the change were enacted, “investments in real assets would face different effective tax rates depending upon whether they are undertaken by an individual, C Corporation, or via the limited partnership structure.”
He estimated the change would amount to a $29 billion tax increase on partnerships. By number, 47% of partnerships are in the real estate field, 10% are in finance and insurance and 5% are in retail trade. However, when measured by assets, 57% are in the finance sector (primarily so-called “hedge” funds) while 20% are in real estate.
In his presentation, Bloomberg argued that uncertainty about how the United States’ long-run budget challenges will be addressed is holding back economic recovery, and opined that the goal of $1.2 trillion in deficit reduction set before the Super Committee remains far too modest.
“Companies do not make major investments when the future of tax and regulatory policies are so up in the air,” Bloomberg said. “Every CEO and business leader that I speak to says the virtually same thing: They are not going to make major investment decisions until they know how Washington intends to grapple with our huge deficits and right now, they have no idea how, or if, that’s going to be accomplished.”