As Congressional Republicans and Democrats spar on Capitol Hill over the latest minutiae of tax reform, many representatives on the left have argued for a rapid increase in the capital gains rate to, as some say, finally “make the 1% pay their fair share.”
They are right: Tax reform that focuses on increasing the cost of investments will undoubtedly hurt the 1%. But there's more to it.
The 1% can usually afford to take this financial hit, but the other 99% of Americans across the country cannot. A tax on investments doesn’t simply hurt the investors who are putting in the investment capital; it also hurts the very beneficiaries of that investment, also known as ordinary Americans.
One proposal by congressional Democrats calls on House Ways and Means Committee Chairman Kevin Brady to eliminate the carried interest “break,” which allows investors to receive a portion of their income under a capital gains tax structure, which means they are taxed less than the income tax. White House Economic Adviser Gary Cohn recently confirmed that President Trump is in favor of this proposal.
Carried interest has gotten a bad rap from the likes of left-wing senators like Elizabeth Warren, who claim it is a weapon of Wall Street that is used to avoid paying taxes. They argue that because investors end up paying a slightly lower tax rate on investments, they’re somehow screwing over “the little guy.”
Nothing could be further from the truth.
Carried interest is very specific in its intention, which is to encourage risk-taking in the economy. Its intention is to only reward the best investments, because it only takes effect once all other investors have been paid back handsomely, and when the investment in American jobs, industries, and other sectors has been successful.
To simplify it, carried interest incentivizes people to take more risks. Some of the businesses that we use every day, like Uber, Amazon, and Apple have revolutionized our lives for the better, because someone was willing to take a risk on a big idea, and potentially never see their money back.
Imagine life without your iPhone, or same day delivery of any product imaginable, or the ability to order an affordable ride and have it arrive at your doorstep in a matter of minutes. While the rich investors certainly benefited from these companies’ success, you and I benefited by an even greater amount.
Such is the nature of free and open markets, which are directly opposed to the high tax and spend narrative of congressional Democrats.
In a left-wing Keynesian narrative, society is frequently interpreted as a “zero-sum” game. If one person is profiting, someone else must be losing, per the likes of the Bernie Sanders crowd. Cries for “big banks” to “pay their fair share” invoke images of a fixed pie, with greedy investors vying to take the biggest slice they can to the detriment of ordinary Americans.
By no means am I arguing that some bankers on Wall Street are not motivated by large profits, or even by pure, unadulterated greed. What I am arguing is that the best way to increase the quality of life for ordinary Americans is to promote robust investment in the American economy, rather than have the likes of Elizabeth Warren and Bernie Sanders go after a few greedy hedge fund managers and, by doing so, ruin investment opportunities in America for the rest of us.
Congressional Democrats are arguing that everyone, including investors and the American people, need to continue paying higher and higher taxes, despite their insincere “middle class” narrative. The American voters are too smart to fall for their games, and they elected Republicans at all levels of government to achieve true tax reform for all.
If congressional Republicans really intend to follow through on their promise to the American people, they need to lower taxes for everyone, and continue the tradition of American innovation and entrepreneurship that has helped make this nation the best in the world.