Obama’s proposed American Jobs Act contains within it a new tax, the Enterprise Value Tax, which applies to any sale of an investment management partnership. The sales are currently taxed at the capital gains rate of 15 percent. Under the new Obama provision, the sales would be taxed at ordinary income rates. This would more than double the tax rate if the bill is signed into law.
In a study released today, The Beacon Hill Institute reports that under the Enterprise Value Tax, the state of Massachusetts would lose 5,400 jobs, $9.5 million in investment and $673 million in disposable income.
In addition to these losses found by the study, the law is also discriminatory and punitive. One trade group representative says the tax “seems to single out the private equity, venture capital and real estate industries in a punitive fashion.”
From the study:
“While the popular conception is that the preferential treatment of capital gains amounts to a giveaway to rich fund managers, the economic reality, therefore, is that any tax on the return to capital, including capital managed by the finance industry, is a double tax that discourages saving and investment. This explains why legislators have long provided for the preferential treatment of capital gains, as well as other capital income, including dividend income and savings placed in pension funds.
The practice of according preferential treatment to capital gains has a nonpartisan history. By raising the tax on a portion of the capital income of general partnerships, the EVT does not, therefore, close a “loophole” at all. The preferential treatment of capital gains, however defined, is not a glitch in the tax code that nobody noticed until now or that is there because of one political party’s disposition to favor investment managers. The preferential treatment of capital gains is based on a policy decision to reduce the penalty on investment and risk taking.”
The Enterprise Value Tax has a negative affect on a single group of businesses which will disproportionately impact states with a higher concentration of those affected businesses. Massachusetts has one of the highest concentrations of those businesses per person in the union, second only to California, a state already in dire need of economic growth.
The full report can be found here.