Policy Documents

Research & Commentary: Enterprise Value Tax

June 7, 2012

A proposal from the Obama administration that has generated significant opposition from the financial sector is the enterprise value tax. This is because high taxes on investment income can be a hindrance to investment by reducing incentives for investors and financial managers to engage in certain financial activities or higher risk investments.

First proposed as part of the American Jobs Act, the measure would declare that the sale of any business that qualifies as an “investment services partnership,” which includes private equity, venture capital, and hedge funds, would be taxed at ordinary income tax rates instead of treated as a long-term capital gain. The administration also proposed increased tax rates on carried interest, which would be a tax increase on the share of partnership profits.

Supporters argue the tax is necessary to prevent financial firms from selling their businesses in order to avoid paying higher taxes on carried interest income. In a letter to members of the congressional budget super-committee established by the debt ceiling agreement, the bill’s cosponsors argued the new tax rates could raise billions of dollars in new tax revenue and Wall Street firms can afford what they call a “modest new tax.”

Opponents argue the new tax is both punitive and discriminatory. Writing in the New York Times, critics of the enterprise value tax pointed out that if it becomes law, “investment management partnerships would be the only businesses in the United States where proceeds from the sale of the business would be taxed at ordinary income rates.”

The enterprise value tax could be devastating for businesses, investment, and economic growth nationwide, research shows. A new study from the Beacon Hill Institute forecasting the effects of the enterprise value tax on the Massachusetts economy found it would double taxes on business partnerships while adding $611 million to Bay State residents’ federal tax burden. The researchers also found the tax would cause Massachusetts to lose 5,400 jobs, reduce annual capital spending by $9.5 million, and cut residents’ real disposable income by $673.2 million.

A possible compromise that would remove the enterprise value tax from the carried interest proposal was signaled by the Obama administration in early May in an attempt to smooth the bill’s progress through Congress. Even without the enterprise value tax, however, the carried interest proposal faces an uphill battle in Congress.

The following articles examine the enterprise value tax from multiple perspectives.

White House Rankles Wall Street with Enterprise Value Tax
http://dealbook.nytimes.com/2011/09/14/white-house-rankles-wall-street-with-enterprise-value-tax/
Peter Lattman of the New York Times speaks with several private equity executives and hedge fund managers about the enterprise value tax provisions in President Barack Obama’s jobs bill. Many of these experts call the new measures both punitive and discriminatory.

The Enterprise Value Tax: What It Means for the Massachusetts Economy
http://heartland.org/policy-documents/enterprise-value-tax-what-it-means-massachusetts-economy
David Tuerck, Paul Bachman, and Frank Conte of the Beacon Hill Institute examine the effects of the enterprise value tax on the Massachusetts economy, finding it would double taxes on business partnerships, add $611 million to Bay State residents’ federal tax burden, cause the state to lose 5,400 jobs, slash annual capital spending by $9.5 million, and cut residents’ real disposable income by $673.2 million. 

Obama’s Proposed Enterprise Value Tax Has Managers Worried
http://www.pionline.com/article/20111114/PRINTSUB/311149908
Hazel Bradford of Pensions and Investments speaks with several financial experts from investment management partnerships such as private equity, venture capital, real estate, and hedge funds about the proposed enterprise value tax and its likely effects. 

The Negative Consequences for Iowa of an Enterprise Value Tax
http://heartland.org/policy-documents/negative-consequences-iowa-enterprise-value-tax
Writing for the Public Interest Institute, Donald Racheter, Jennifer Crull, and Amy Frantz quantify the net impact an EVT would have on revenue and job creation both nationally and in Iowa. The results would be alarming for Iowa and contradict the purported objective of the American Jobs Act, which is intended to create jobs rather than destroy them, the authors conclude. 

The Economic Impact of an Enterprise Value Tax
http://heartland.org/policy-documents/economic-impact-enterprise-value-tax
J. Scott Moody, chief economist of the Maine Heritage Policy Center, examines the likely effects of the enterprise value tax on the state of Washington’s economy. Moody found the federal tax would extract millions of additional dollars from Washington’s economy every year, money the state’s citizens could otherwise use to expand their real estate, finance, and manufacturing businesses, including innovative high-tech and natural resource-based industries crucial to the state’s economic recovery. 

Carried Interest Legislative Proposals and Enterprise Value Tax
http://heartland.org/policy-documents/carried-interest-legislative-proposals-and-enterprise-value-tax
Writing in Tax Notes, Jack Levin, Donald Rocap, and William R. Welke caution legislators against justifying the enterprise value tax based on large gains earned by a few venture capital, private equity, real estate, and hedge fund principals in a few select years before onset of the 2006–2009 recession. They argue that if Congress develops a habit of placing harsh taxes on any business activity that produces significant profits even for only a brief period, entrepreneurs will feel less safe working hard to build businesses. 

Squeezing Entrepreneurs: The Economic Impact of an Enterprise Value Tax in New Jersey
http://heartland.org/policy-documents/squeezing-entrepreneurs-economic-impact-enterprise-value-tax-new-jersey
The Common Sense Institute of New Jersey examines the nature of the enterprise value tax, its likely national impact, and its magnified effect in New Jersey. The study also explores the EVT’s fiscal federalism impact on the states and provides a methodological discussion of the model used to estimate the tax impact of the EVT. 

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.