Private equity investment would fall under carried interest proposal

Private equity investment would decrease by several billion a year while causing a loss of jobs under a pending carried interest proposal, according to a new study. 

Increasing the tax rate on profits earned by investment fund managers would reduce private equity investment by $7 billion a year, from $34 billion to $27 billion annually, according to a study by the Private Equity Council tracking the connection between tax rates and private equity investment. 

"This data is consistent over two decades and confirms that tax increases reduce private equity investment activity and that the proposed 157 percent tax increase on investment partnerships would have a harmful effect on the economy, the recovery and job creation," PEC President Douglas Lowenstein said in a release Tuesday. "We have said throughout this debate that private equity will continue, but this will have an adverse economic impact."

Senate Finance Chairman Max Baucus (D-Mont.) made some changes Tuesday to the carried interest provisions that would tax as regular income 65 percent of the carried interest paid as compensation to those in private equity investments after 2012. The House version taxes 75 percent as regular income, with a rate as high as 39.6 percent. 

Right now, all carried interest is taxed at 15 percent, the capital gains rate. That rate will increase to 20 percent when the Bush tax cuts expire at the end of this year. 

Increasing the tax rate on carried interest also could reduce the overall value of the nation's commercial real estate assets and result in an increase in commercial mortgage default rates, the study said. 

Maintaining the same policies could also save between 37,000 and 128,000 jobs, according to the study. 

But lawmakers are under pressure to find tax revenue, specifically from the financial sector, and have been eyeing carried interest as an option. 

During the past 30 years, annual invested equity rose from $723 million in 1980 to $49 billion by 2009. In 2000, a record $137 billion was invested in more than 7,000 businesses, according to the study. 

The study looked at the direct effect of a percentage point increase in the tax rate on private equity investment, which amounted to a $1.8 billion decline in investment. 

A 14.7 percentage point increase in the tax rate from an estimated 23.8 percent in 2013 to 38.5 percent, as proposed by the House bill, would result in a $27 billion decline in investment. 

A second equation shows that for every percentage point increase in the marginal tax rate there would be a 1.07 decline in investment. Based on 2009 levels of investment, that would result in an annual investment reduction of $7.7 billion.