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Tax policy received scant attention in the presidential debates, but when it did both candidates displayed a serious lack of understanding regarding at least one critical component of the tax code: carried interest. Although arcane in nature and unheard of by most, carried interest is a tax rule that fosters capital formation, encourages investment and ultimately leads to job creation.
Simply put, carried interest is a type of capital gain. Homeowners are familiar with the term ‘capital gain’ which in that circumstance refers to the increase in value of your home over time as you make improvements or rising market prices increase its sale price. If you sell your principle residence and make more than $500,000 in profit as a married couple, you must pay a capital gains tax. You pay the capital gains tax rate, not the ordinary income tax rate, on the transaction because you have already paid taxes on the income used to purchase the house.
Likewise carried interest is a long-term capital gain that is earned by an investment partnership. In this case the asset is not a house, but an investment portfolio that the partnership established and grew over time. When sold, the portfolio manager pays a lower capital gains tax rate on the fund’s profit, not the higher ordinary income tax rate.
The presidential candidates have, unfortunately, decided to portray carried interest capital gains as a loophole granted to special interests. Both candidates want to raise this capital gains rate claiming it gives investment fund managers an unfair tax break. Fairness, however, is not what such an increase would achieve. Rather it would amount to double taxation.
The negative effects would be much worse than over-taxing a sub-set of taxpayers. The partnerships that are formed when an investor joins with a fund manager results in a structure that fosters informed investments that grow over time. This growth generates profits. When the profits are re-invested that is called capital. Such capital is invested in businesses so that they can grow, expand and create jobs.
Carried interest capital gain rules play a critical role in allowing capital to form. If you raise the carried interest capital gain tax rate, the government will take more in taxes–dramatically decreasing the amount of capital available for investment in the economy.
A significant portion of that capital available for investment is invested right here in Pennsylvania. According to the American Investment Council, private equity firms invested an estimated $24.49 billion in Pennsylvania-based companies in 2015. There are 143 private equity firms headquartered in Pennsylvania. These companies support more than 185,103 workers at facilities both in Pennsylvania and in other states.
In other words, carried interest capital gains is not a tax device aimed at making Wall Street fund managers richer. Rather, it is appropriate taxation that makes more capital available for investment in the companies that are creating much needed new jobs for Pennsylvanians and elsewhere.
It is common in an election year for candidates to propose new government spending programs in an effort to win votes. They then go looking for ways to pay for that higher spending. “Reforming” the nation’s complex tax structure is often an effective target.
But, changes can have unintended consequences. Raising the current 23.8% carried interest rate to 33% as proposed by Donald Trump or almost 50% as suggested by Hillary Clinton would result in only a modest increase in tax revenue flowing into the federal treasury. And we all know that any move to raise this rate would likely be coupled with other tax hikes on working families and small businesses.
Even if you set aside the unfairness of double taxing investors, raising the carried interest tax rate or eliminating that category of capital gain entirely would have the detrimental effect of reducing capital formation. That means dramatically fewer dollars available for companies to grow and create new jobs. Carried interest is not a tax break for the wealthy; rather it is a way for investors to put their earnings to work creating the new jobs needed as the nation struggles to recover from the Great Recession.
Lowman S. Henry is Chairman and CEO of the Lincoln Institute of Public Opinion Research, Inc. and host of the weekly Lincoln Radio Journal. His e-mail address is firstname.lastname@example.org
Permission to reprint is granted provided author and affiliation are cited.
Pennsylvania’s business climate remains sluggish as the commonwealth continues to struggle in the aftermath of the Great Recession. Business conditions, employment levels and sales have all backslid over the past six months with owners blaming high taxes, government regulation and a lack of skilled workers for the malaise.
The Fall 2016 Keystone Business Climate Survey conducted by the Lincoln Institute of Public Opinion Research found half of the business owners and chief executive officers survey saying the state’s economy has gotten worse over the past six months, only five percent felt Pennsylvania’s business climate had improved during that time frame.
Comparatively, one year ago 42% felt the business climate had gotten worse, while six percent at that time said it had improved. There is little optimism that business conditions will improve soon. Forty-four percent say they expect the state’s economy to continue getting worse over the upcoming six months, five percent expect to see an improvement in the business climate.
Along with that pessimistic overall prognosis twice as many businesses report having reduced their workforce as say they have added jobs. The majority of businesses – 66% – reported that employment levels remained about the same over the past six months. But, 21% said they have reduced their employee compliment while 11% added employees. The picture improves slightly as the owners/CEOs look ahead to the coming six months. Sixteen percent say they plan to add employees, 12% expect to reduce their workforce.
Sales have also taken a hit over the past six months. Thirty-nine percent said their sales remained about the same from March thru September. But, 39% reported decreased sales and were off-set by only 21% having reported sales increases. Looking forward, 51% expect sales to remain stable. Twenty-Four percent forecast an increase in sales, 23% are braced for a sales decrease.
Factors Impacting Business Growth
Among the factors cited by businesses for why they considered expanding their businesses over the past two years, but decided against expansion taxes and regulation topped the list of barriers. Onerous federal regulations were cited by 41% of the businesses that considered, but rejected, expansion plans. Coming in a close second was Governor Tom Wolf’s proposed tax increases cited by 40% as a reason why they did not expand. Pennsylvania’s tax structure was listed by 29% as having frustrated expansion plans.
Thirty-six percent cited onerous state regulations as a barrier to expansion, while another 35% cited the lack of a skilled work force. Nearly half of the businesses surveyed said they currently have open positions for which they have been unable to find qualified applicants. Forty-two percent say they have been unable to fill one to five jobs; 2% have six to ten open positions; one percent has more than ten jobs unfilled due to lack of qualified applicants.
Pennsylvania fiscal condition continues to be of concern to the business owners and CEOs participating in the Fall 2016 Keystone Business Climate Survey. Eighty-five percent disagreed – 70% strongly so – with Republicans in the General Assembly having agreed to a $1.4 billion spending increase and then raising taxes to enact the current year’s state budget.
Looking ahead to what will likely be another epic budget battle next summer, 92% say the General Assembly must address cost drivers such as pension reform before considering an increase in taxes. In fact, 34% said the state’s massive unfunded pension liability has caused them to not consider expanding in Pennsylvania.
Among pension reforms being considered is moving state employees from the current defined benefit pension system to a defined contribution plan. Thirty-nine percent of the businesses surveyed said they offer employees a company administered defined contribution plan to which the company contributes. Only 3% of the private businesses surveyed continue to offer a defined pension plan. Another 40% offer employees no retirement plans at all.
Earlier this year the General Assembly did pass, and Governor Tom Wolf signed into law, some modest changes to the state’s century-old liquor laws. Business owners/CEOs said those reforms did not go far enough. Fifty-two percent would like for the state to completely privatize both retail sales and wholesale distribution of alcoholic products. Another 26% would like to see just retail sales privatized. Twelve percent said the recent changes were sufficient.
Pennsylvania has an abundant supply of natural gas, but additional pipelines are needed to get that gas to market. Eight-nine percent agree – 60% strongly agree – that this resource should be developed and more pipelines built. Nine percent disagree. Twenty-five percent said easier access to natural gas would be a benefit to their business with an additional 14% saying it would be a major benefit. Thirty percent said they do not utilize natural gas in their business.
Over the past nine years since the passage of Act 44 the Pennsylvania Turnpike Commission has diverted $5.2 billion to PennDOT to help pay for state highways and public transit. This has resulted in annual fare increases for turnpike travelers. Sixty-three percent of those participating in the Fall 2016 Keystone Business Climate Survey said this should end and fare revenue be used only to maintain and improve the turnpike. Twenty-nine percent felt the sharing of revenue should continue.
Job Approval Ratings
President Barack Obama and Governor Tom Wolf continue to suffer from significantly low job approval ratings among the business community. Eighty-four percent have a negative view of the President’s job performance; 86% disapprove of the job being done by Governor Wolf.
U.S. Senator Pat Toomey, who faces re-election in November, received a 50% job approval rating against 23% with a negative view of his job performance. The job being done by U.S. Senator Robert P. Casey, Jr. is viewed negatively by 56% of the business owners/CEOs, 18% give him positive marks. Likewise, 54% say Federal Reserve Chair Janet Yellen is doing a poor job, 15% approve.
Pennsylvania has three statewide constitutional or “row” offices. Two are serving by appointment, their elected predecessors having resigned after being convicted of crimes. Auditor General Eugene DePasquale is the surviving official elected in 2012 still in office. Seventy-three percent have no opinion of his job performance, with 14% saying he is doing a good job and 14% having a negative opinion of his job performance. Likewise about two-thirds offered no opinions on state Treasurer Tim Reese or Attorney General Bruce Beemer. Of those who did, 18% give Beemer a negative rating, 6% a positive one while 15% hold a negative view of Reese, 5% a positive view.
As has been the case throughout the Keystone Business Climate Survey’s 22-year history the owners and chief executive officers hold the federal congress and the state legislature in very low regard. Just 8% approve of the job being done by the United States Senate, 11% approve of the job being done by the U.S. House of Representatives. Seventeen percent approve of the job performance of the Pennsylvania Senate; 19% approve of the job being done by the Pennsylvania House of Representatives.
Finally, the Lincoln Institute asked participants in the survey who they support for President of the United States and United State Senator from Pennsylvania in the upcoming November General Election. Seventy-three percent said they will vote for the Republican nominee Donald Trump, 12% support the Democratic nominee Hillary Clinton and 6% say they will vote for Libertarian Gary Johnson. Republican incumbent U.S. Senator Pat Toomey has the support of 81% of the owners/CEOs, Democratic challenger Katie McGinty has 12% support.
The Fall 2016 Keystone Business Climate Survey was conducted electronically by the Lincoln Institute of Public Opinion Research, Inc. from September 13 through October 5, 2016. A total of 370 businesses responded to the survey invitation. Of those 81% are the owner of the business, 14% are the CEO/COO/CFO and one percent a business manager.
Twenty-five percent of the responses came from the Philadelphia/southeastern part of the state; 18% from Pittsburgh/southwestern Pennsylvania; 16% from south/central Pennsylvania; 13% from northwestern Pennsylvania; 11% from northeastern Pennsylvania; 10% from north-central Pennsylvania; 4% from the Lehigh Valley and 3% from the Altoona/Johnstown area.
Complete numeric results are posted on-line at http://www.lincolninstitute.org
2016 Republican Delegate/Alternate Delegate Survey: Supreme Court, Terrorist, Constitutional Rights Top Delegate Concerns
Pennsylvania’s delegation to the 2016 Republican National Convention rated U.S. Supreme Court nominations, terrorism and protecting constitutional rights as the most important issues facing the nation while viewing the GOP-controlled congress as having failed to effectively counter the policies of President Barack Obama.
The Lincoln Institute’s quadrennial survey of delegates and alternate delegates found economic issues outweighed social issues and foreign affairs in their selection of a presidential candidate, but 60% said a combination of all three issue sets factored into their decision.
That was reflected in the importance given to the various issues facing the nation. No social issues topped the delegation’s list of important issues. A clear concern over fundamental rights emerged from the survey data as the selection of nominees to the U.S. Supreme Court topped the importance scale with 90% saying the seating of justices was a very important issue. Concerns over ISIS/terrorism rated as second most important, but protecting constitutional rights followed closely as the delegation’s third most important area of concern. Jobs and the economy, the budget deficit/government spending and illegal immigration rounded out the top concerns.
Pennsylvania’s delegation hues to traditional Republican positions on President Obama’s job performance. Eighty-seven percent say his administration’s foreign policies have made the United States much less secure; only one delegate thought those policies have made the nation more secure. When asked if President Obama was on the right track or wrong track in responding to the threat of ISIS and international terrorism there was unanimity – 100% said wrong track. Until the threat of ISIS/terrorism has ended, 64% of the delegation thinks the U.S. should ban entry of citizens from countries that are hotbeds of terrorist activity; 26% want to ban all Muslims from entering the country; 13% say current laws are sufficient. Eighty-nine percent of the delegates/alternate delegates strongly disapprove of the Obama Administration’s nuclear deal with Iran, another 8% somewhat disapprove. Only 3% expressed approval.
When asked if the U.S. economy is on the right track or off in the wrong direction 97% said wrong direction. Ninety-two percent of the Pennsylvania delegation to the Republican National Convention places the blame for the nation’s economic ills on President Obama, but majorities also fault labor unions and congress. There is strong support, 72% with another 26% somewhat supporting lowering tax rates as a means of stimulating economic growth.
The delegation, reflecting the views of its presumptive presidential nominee, opposes free trade agreements such as the Trans Pacific Partnership (TPP). Sixty-nine percent oppose TPP with 31% expressing strong opposition. In terms of balancing the federal budget, 79% would do so only by cutting spending; 21% would employ a combination of tax hikes and spending cuts. Concern was voiced over the viability of the Social Security system: 57% think the system will be around for future generations – but only with substantial changes. Forty percent think Social Security is headed to bankruptcy; only 4% think it will survive without changes. To provide for the nation’s energy needs, 93% favor more domestic drilling as a solution; 50% support development of alternative fuels and 30% urge conservation.
Illegal immigration has been a dominate issue in Donald Trump’s presidential campaign. The Pennsylvania delegation to the Republican national convention reflects his stance on the issue. Fifty-six percent of the delegation wants immediate deportation of illegal aliens; 23% would accept granting permanent worker status. Not a single delegate favors granting illegal aliens full citizenship.
Also spurring Donald Trump’s march to the Republican Presidential nomination was grassroots frustration with the ineffectiveness of the party’s elected officials in Washington, D.C. Eighty percent of the Pennsylvania delegation said the Republican-controlled congress has been ineffective at checking President Obama’s executive power.
As a result, over two-thirds hold a negative view of the job being done by the U.S. Senate and the U.S. House of Representatives.
A strong anti-government thread is woven into the state’s delegation as 97% said they view the federal government as an adversarial force when it comes to helping solve problems. Only two delegates view the federal government as a positive force. Likewise, 97% say our basic rights as Americans are God-given; only two delegates view our rights as granted to us by government.
The Lincoln Institute’s survey of delegates/alternate delegates to the 2016 Republican National Convention found 92% want Republicans in the general assembly to continue holding the line on more spending and higher taxes. Ironically, those views were expressed as the GOP-controlled legislature approved a state budget which dramatically increased spending and included a wide array of tax hikes. Ninety-six percent agree with the strategy – now abandoned by Republican legislative leaders – that cost drivers like pension reform should be addressed before the general assembly considers any increase in taxes.
Sixty-five percent of the delegation feels the property tax-based system currently utilized by school districts, local and county governments to fund services is unfair to taxpayers. There is little agreement though on how to otherwise raise revenue. Twenty percent favor a higher state sales tax rate while 16% would support a more broad based state sales tax at the current rate. There was nominal support for local sales taxes, local earned income taxes or a higher state income tax. On a related note, 61% favor allowing vouchers or grants to students who wish to attend a public school in a district other than their own, 32% do not.
Generally speaking, 60% of the delegates/alternate delegates think the state income tax rate is too high, another 41% say it is about right. Eighty-seven percent feel state business taxes are too high, only 13% think taxes on business are about right. When it comes to economic development, 96% favor having the state cut business taxes and regulation. Just 4% favor having the state borrow money to help select business ventures.
There is strong support among Pennsylvania’s delegation for a Right to Work Law, which means that a worker cannot be fired or kept from having a job for either joining or not joining a labor union. Eighty-five percent favor the adoption of a right to work law. On a related issue, 76% support enacting a ban on public school teacher strikes.
Pennsylvania’s delegation to the Republican National Convention is a very conservative one. Forty percent say they are very conservative, another 47% say they are somewhat conservative. Thirteen percent proclaimed themselves to be moderates, and one delegate adopted the very liberal/progressive title.
The delegation is skewed to higher age demographics. About a third are over the age of 65, another third between the ages of 50-65. Twenty-eight percent fall in the 30-50 age group, while only one respondent was under 30. Of the delegates responding to the survey invitation 62% are male, 38% female.
The Lincoln Institute survey of delegates/alternate delegates to the 2016 Republican National Convention was conducted electronically between June 28 and July 14. 2016. A total of 73 delegates/alternate delegates participated in the survey. Complete numeric results are available on-line at www.lincolninstitute.org.
For the first time in a decade, by a narrow margin, more Pennsylvania employers say business conditions in the commonwealth are improving than say the state’s economy is getting worse. But, that optimism is tempered by a lack of job creation and lower wage hikes due to the implementation of the Affordable Care Act, better known as Obamacare.
George W. Bush was president and on the verge of re-election in 2004, the last time respondents to the Lincoln Institute’s Keystone Business Climate Survey thought the business climate was getting better rather than worse. Since then the nation has experienced the Great Recession and subsequent slow recovery.
But, the current survey finds 20% of the business owners and CEOs responding say over the past six months business conditions in Pennsylvania have gotten better, while 19% say the state’s economy has gotten worse. By comparison, one year ago 31% felt business conditions had gotten worse and just 14% saw an improvement.
There is not, however, optimism for the immediate future. Looking ahead six months, 27% expect business conditions in Pennsylvania to get worse, while 16% expect conditions to get better.
Driving the current burst of optimism are increasing sales. Thirty-six percent of the companies said sales have increased over the past six months as 24% reported decreased sales. Looking ahead, 32% project sales will increase, 13% expect sales to drop.
Employment levels dropped over the past six months, with 20% reporting higher employment and 24% saying employment at their business has decreased. Looking ahead six months, 21% project adding employees, while 9% plan to employ fewer workers.
Impact of the Affordable Care Act
It is clear the Affordable Care Act (ACA), or Obamacare, is having a negative impact on both the number of jobs that are being created, and on wages and pay hikes. Twenty-five percent of the business leaders participating in the survey said they have decided not to hire additional employees due to the requirements of Obamacare. Ten percent said they have actually reduced the number of employees because of ACA; while another 3% said they hired, but did so later than they had planned. Less than 1% said they hired sooner than planned because of Obamacare. Fifty-eight percent said ACA has had no impact on their hiring plans.
In terms of wages/salaries, 33% said they have delayed giving pay raises due to the costs of Obamacare. Twenty-eight percent indicated they reduced the amounts of pay raises, while 26% said they paid new hires less to compensate for the costs associated with compliance of the Affordable Care Act. Five percent reduced the pay of current employees, while 2% said they increased employee pay in response to ACA requirements. A total of 42% said Obamacare has no impact on their wages/salaries.
Education spending has been a major issue in the gubernatorial campaign. But, unlike the electorate at-large, business owners and CEOs participating in the Fall 2014 Keystone Business Climate Surveysay the state spends too much money on public education. Forty percent think state government spend too much on public education, 29% say the state spends too little, while 27% say state spending on public education is about the right amount.
By a large margin, 78% to 19%, the employers say they are not willing to pay higher taxes to provide additional funding to public education. There is, however, strong support for the Educational Improvement Tax Credit (EITC) which businesses can claim for donating money to K-12 educational institutions. Forty-seven percent think the General Assembly should allocate more month to the tax credit fund so more businesses can participate; 36% say the fund should be kept at current levels.
Taxes have also been a major campaign issue in 2014. When asked whether Pennsylvania should retain the current “flat” income tax or move to a “graduated” income tax where low income earners are exempt and higher income earners pay a higher rate 84% said they support the current “flat” income tax, 14% would like to see a “graduated” rate.
A proposal to exempt the first $30,000 from state income taxes and raise the rate for money earned above that level from 3.07% to 5% drew strong opposition from the business leaders. Seventy-three percent oppose such a system with 60% saying they are strongly opposed. Twenty-three percent said they would support such a change.
Mandating paid sick leave for employees was opposed by three-quarters of the business owners and CEOs who participated in the Lincoln Institute survey. Seventeen percent said they would support mandating paid sick leave for businesses with over 50 employees. Another 6% support mandating paid sick leave for all businesses regardless of size.
Job Approval Ratings
Mirroring the national trend, President Obama received a highly negative job approval rating from the business owners and CEOs. Eighty-five percent voiced a negative view of the president, while 13% offered a positive assessment.
U.S. Senator Pat Toomey is viewed favorably by 51% of the survey participants while 24% have a negative view. The numbers reverse for U.S. Senator Robert P. Casey, Jr. as 60% offered a negative view of his job performance against a 21% positive rating. Fed Chairman Janet Yellen received a 38% negative / 28% positive rating; and, U.S. Treasury Secretary Jack Lew scored a 42% negative / 8% positive.
At the state level Governor Tom Corbett sports a 52% positive rating while 35% disapprove of the job being done by the Republican governor. The CEOs and business owners turned thumbs down on Attorney General Kathleen Kane, who received a 49% negative rating against just 16% positive. Most offered no opinion on the job performance of Auditor General Eugene Depasquale and State Treasurer Rob McCord. Of those who did, Depasquale had a 20% negative / 11% positive rating and McCord scored 21% negative / 17% positive.
Participants in the Fall 2014 Keystone Business Climate Survey took a dim view of the job being done by both Congress and by the Pennsylvania General Assembly. Eighty-nine percent offered a negative assessment of the U.S. Senate, with 7% having a positive view. The U.S. House of Representatives fared slightly better scoring a 72% negative / 22% positive rating. Sixty-three percent have a negative view of the job being done by the Pennsylvania Senate, 19% approve. The Pennsylvania House of Representatives turned in a marginally higher score, with a 62% negative / 23% positive rating.
And, Governor Tom Corbett finally came out ahead in one poll. Sixty-five percent of the business owners and CEOs said they plan to vote for the incumbent governor in the November 4th General Election, 20% say they will cast their ballot for Democratic challenger Tom Wolf. However, 53% expect Wolf to win the election, while 29% predict a Corbett victory.
The Lincoln Institute’s 2014 Keystone Business Climate Survey was conducted electronically from September 26, 2014 through October 17, 2014. A total of 316 responses were received. Of those, 69% are the owner of their business, 24% are the CEO/COO or CFO, another 4% are a state or local manager. Twenty-seven percent of the respondents are located in southeastern Pennsylvania, 18% in southwestern Pennsylvania, 14% in the northwest section of the state, 17% in south-central Pennsylvania, 11% in northeastern Pennsylvania, 6% in the Lehigh Valley, six percent in north-central Pennsylvania and 1% in the Altoona/Johnstown area. Complete numeric results are available at www.lincolninstitute.org.