MOORE: Washington’s latest tax assault on private equity and venture capital industries

What is it about politicians in Washington that they can’t stand progress or the thought of anyone getting rich?

Consider the latest attacks against the private equity and venture capital industries. These financers are some of the most dynamic risk-takers on the economic playing field. They are disrupting the old, stodgy banking and Wall Street financing networks.

These investors inject timely growth capital into emerging startups and private equity-forming midsize companies that are hungry for funding for survival but too small to be publicly traded on the big boards.

Private equity and venture capital track records in picking future gazelles and helping them sprint faster are almost a uniquely American success story. 

Now, thanks to the industry’s winning track record in saving companies and jobs and making people rich, Washington thinks they are doing too well and wants to raise the tax rate on the industry by nearly 50%.

They want to slay the goose that has been laying golden eggs for decades.

How golden? Last year alone, private equity firms invested $350 billion of risk capital into companies across a broad range, including everyday manufacturing, construction companies and cutting-edge artificial intelligence.

Private equity firms provide the investment dollars and the critical management expertise that enables companies to thrive. Academic research has shown that when companies make private equity investments, they are more innovative and rise in value.

They employ 13.3 million people in the United States, generate $1.1 trillion in wages, contribute $2 trillion to the nation’s gross domestic product and contribute $223 billion in federal tax revenue.

For investors, such as pension funds and foundations, returns have generally been higher from private equity and venture capital funds than from investing in publicly traded stocks.

How are these dealmakers villains? You would have to ask Sen. Bernard Sanders and Rep. Alexandria Ocasio-Cortez.

When private equity and venture capital firms invest in companies and add value to their operations, they take a portion of the gains. This “carried interest” arrangement aligns the incentives of the new investors with the old.  When these firms successfully create significant new shareholder value, they are well compensated.

No one in the industry has a problem with this. However, some Democrats in Congress want to charge the investors personal income tax rates of up to 39.6% instead of the 24% capital gains tax.

A new study by Charles Swenson, a professor at the University of Southern California, shows that implementing the tax changes pushed by Democrats would trigger approximately 520,000 job losses over a 10-year period and an $85 billion decline in tax revenue.

That’s right. The proposal could cause the Treasury to lose revenue.

Some Democrats also complain that investors are raiders who are overly focused on get-rich-quick schemes, including selling off assets and closing the business. That sometimes happens with fraudsters, but it’s the exception, not the rule.

Because of the equity feature of the terms, the entire structure of the private equity investment rewards long-term success. As part of the 2017 Trump tax cut deal, the industry agreed to a three-year holding period of stock for the managers of these funds to qualify for lower capital gains treatment on the appreciated value of the companies they invest in and advise.

In most stock acquisitions, the holding term is only one year for capital gains tax treatment.

This provision was a fair compromise and should be made permanent, just as the entire Trump tax reforms of 2017 should be. The goal of the Trump 2.0 tax bill should be to encourage more investment by keeping tax rates low and not raising them.

• Stephen Moore is co-founder of Unleash Prosperity and co-author of the book “The Trump Economic Miracle.”