Thank you, Chairman Baucus, for calling this second hearing on the tax treatment of carried interest. At the last hearing, we had a balanced approach. We have the same here. This hearing, and the committee’s inquiry, is about the distinction between capital income and labor income. This issue arises frequently in partnerships, when a person receives a carried interest, or an interest in a partnership’s profits, in exchange for performing services for the partnership, as opposed to contributing capital.
This hearing is not about well-settled principles regarding capital assets or the propriety of current capital gains rates. It is not an attack on the investor class or capital formation. We are not questioning the tax treatment of the return on any partner’s invested capital. That return is, and should continue to be, taxed at preferential capital gains rates.
This hearing is also not about a revenue grab from Congress. It is not about whether alternative asset managers are good or bad for society. We’re not here to have a hearing on each industry, measure its value to society, and assign a tax rate accordingly. This hearing is about our responsibility to ensure that the tax code is operating fairly and consistently with the intent behind enacted policies. If it is not, then there is an unintended subsidy being provided to some, while others pay for it with higher taxes.
There are a lot of sound, pro-growth tax policies that Congress needs to advance to keep our economy strong. The individual capital gain preference is an obvious one. Like I’ve done before, I’ll be working to get that policy extended. Another policy is our corporate tax rate, which is the second highest among OECD countries. We’re standing still while our trading partners are lowering corporate tax rates. Economists tell us to make our system more efficient by lowering rates and broadening the base by eliminating preferences for specific industries. Well, we’re looking at a potential base broadener here. But if we can’t even examine these kinds of issues in a deliberate, thoughtful way, then I’m afraid we’ll never get in a position to talk about lowering rates.
Folks on both sides of the aisle ought to roll up their sleeves, move away from partisan talking points, and join Chairman Baucus and me in finding the facts. The carried interest issue is complicated, and some might say headache-inducing, but this committee is responsible for getting the policy right. So we need to take our aspirin and wade in. Mr. Chairman, you remember the T.V. series “Dragnet” and the characters, Sergeant Joe Friday and his partner Bill Gannon. Sergeant Joe Friday used to say, “just the facts, ma’am.” Like Joe Friday, we’re just trying to get the facts. We haven’t made up our minds yet. With that open mind, I look forward to today’s discussion.
I’d also like to submit for the record my response to some of the criticisms of our publicly traded partnership bill. The two arguments I respond to are (1) it singles out private equity and hedge fund management firms; and (2) it would result in unfair triple tax on private equity management firms that go public. I disagree with those arguments, but rather than take the time going through my detailed response here, I will just put it in the record.