WASHINGTON, DC-Changing the tax characterization of carried interest is one of the methods President Obama is proposing to use to pay for his $447 billion jobs package unveiled last week. The plan calls for $18 billion in new revenue by taxing carried interest of private equity managers and real estate investors as ordinary income as opposed to capital gains.
The specter of taxing carried interest at ordinary tax rates has been dogging the real estate industry--as well as other affected sectors--for years. So far, intense lobbying has managed to derail such attempts. This time, however, might be different because of the politics involved. While few observers believe Obama will get his entire $447 billion package, Republicans will be loathe to dismiss it entirely and thus be painted as obstructionists. So some of its measures are likely to be passed--along with accompany revenue-raising changes.
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Whether the expected expenditures in infrastructure and construction offset a possible carried interest change is debatable. The math behind a changed carried interest tax, industry representatives say, would keep many projects from ever getting off the ground, as partners would find them too unprofitable or the risk too unacceptable at such tax rates. Still, the industry should not overlook the boost an increase in infrastructure spending could deliver, Mark Stapp, executive director of the Master of Real Estate Development program at the WP Carey School of Business at Arizona State University, tells GlobeSt.com.
"Spending on education, infrastructure, focusing on immigration and the rules for capital formation--these are the major drivers to growth," he says. According to Stapp, none of these areas have seen much progress, which is why the proposed infrastructure bank could deliver a wallop. "It is a durable thing as opposed to the tax credits in the plan, which may or may not be for the long term."
Indeed, many economists have voiced doubts as to whether the tax credits laid out in Obama’s plan are sufficient to drive employment--even in normal circumstances. The issue, the naysayers maintain, is that demand is too low for job creation and no amount of tax credits can change that unless a firm was already planning on hiring.
Infrastructure development is different, the theory goes. It needs to get built by people who are paid wages to do so. A new initiative by the US Dept. of Health and Human Services will soon test this notion of infrastructure spending versus tax credits as a driver of job growth. It will be providing $700 million in funding, authorized by the Affordable Care Act, to build community health centers across the US.
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