The Impact of Increasing Carried Interest Tax Rates on the U.S. Economy

Abstract

This study looks at recent congressional proposals to increase the tax rate on the general partner's share of a limited partnership's profits, known as carried interest, from the long-term capital gains rate of 15% to ordinary income tax rates of 35%. We show that carried interest is an element of $15.3 trillion in partnership capital used by 16.2 million Americans in every sector of the U.S. economy engaged in capital formation. Increasing the tax rate on carried interest would lead to changes in the structure of partnership agreements; incremental tax collections would be small. To the extent that the tax increase could not be avoided by restructuring, the costs would be borne by all the members of the investment process, including general partners, limited partners and their beneficiaries, as well as owners and employees of portfolio companies. Increasing carried interest taxes would reduce the amount of long-term capital available to the U.S. economy and undermine investment, innovation, entrepreneurial activity, productivity, growth, and the ability of U.S. companies to compete in the global market.