The column below reflects the views of the author, and these opinions are neither endorsed nor supported by WisOpinion.com.
Over the past year and a half we’ve all read countless stories about businesses that closed, and never reopened, due to the pandemic. According to the Federal Reserve, the economic devastation was so bad that an estimated 200,000 more U.S. small businesses closed in 2020 than in an average year. While it is heartbreaking that many of these businesses will never come back, we can come together as a community and build a new legacy. Of course, this will require not only hard work but the capital needed to fund new business ventures. Unfortunately, if some in Congress get their way, the investments needed to dig our way out of the pandemic’s economic downturn may not be there to help.
While some good has come out of Washington as they attempted to react to the economic crisis caused by COVID-19, there have also been some bad ideas. Chief among those are attempts by a select group of lawmakers who don’t seem to understand the dynamics of how and why private investment occurs and are now hell bent on attacking the incentives investors receive for the large risks they take.
Carried interest is used as one such incentive for investors for their work in managing venture capital and private equity funds. These funds invest in the innovative businesses that have made America the world’s strongest economic engine. Additionally, carried interest is only received when a fund manager successfully delivers a significant return on investment to the fund’s investors. In short, carried interest incentivizes the long term, growth focused, investments that we all want and need to see our communities grow.
Unfortunately, some in Washington have introduced misguided proposals like H.R. 1068 and S. 1598, which would increase taxes on carried interest by an astounding 98%. The idea that some would think you could nearly double taxes on investors and not see fewer investments would be comical, if it wasn’t so dangerous. These same members of Congress are even trying to sneak this tax increase plan into the massive spending bill currently being debated.
Carried interest is used in a wide variety of situations to incentivize investors who are willing to forgo the security of a salary in order to invest their time and effort helping support the growth of innovative businesses. It’s used by general partnerships who own and operate multifamily rental housing, office buildings, shopping centers, hotels, distribution centers and senior living community, to name a few. In fact, in most cases funds who leverage carried interest help propel the growth of small businesses. According to the American Investment Council, 86% of the businesses that benefit from this kind of private investment employ 500 workers or fewer, with about one-third of them employing 10 or less.
A recent study by the U.S. Chamber of Commerce that explored the potential impact if Congress were to pass H.R. 1068 and S. 1598 found that “The net result of this would be that the national workforce may drop by up to 4.9 million jobs (over 3% of the country’s workforce), resulting in a potential annual loss of $96 billion annually in combined federal, state, and local revenues. Public pension funds, which support retirees, may lose up to $3 billion annually since they would need to switch some of their investments into lower-yielding investments.”
If our state and nation are to fully recover from the pandemic, we’ll all need to work together, and that includes incentivizing the private investors we need to finance the growth. That’s why we need Congress to focus on ideas that will promote investments and help our nation’s entrepreneurs to get the capital they need, not push ideas like H.R. 1068 and S. 1598 that will make the recovery longer and harder than it needs to be.
–Cordio is the founder/partner of several Milwaukee area tech companies, and a community business leader who is involved in several economic development initiatives in Wisconsin.