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WASHINGTON, DC-Real estate associations are becoming increasingly alarmed as proposals to tax carried interest at higher rates are moving closer to fruition. Last month the House Ways and Means Committee introduced a comprehensive tax plan that would, among other measures, more than double, to 35%, the tax rate on carried interest. Various studies have put forth estimates of the cost of this tax–one number is $2.5 billion, for instance–that commercial real estate industry watchers say grossly underestimate the true effect.

A study commission by the Real Estate Roundtable, released today, for instance, finds that the cost of this proposal, if implemented into law, could reach $20 billion or more. Such a law, Douglas Holtz-Eakin, former Director of the Congressional Budget Office and author of the study, told reporters during a conference call, will certainly not be the minor event as it has been characterized.

Holtz-Eakin points to declining jobs in such industries as construction, the pullback of capital from the riskiest development projects–such as those that require environmental remediation or are in inner city districts–and the wasted resources sure to be spent on devising structures to avoid the tax as likely results.

The most significant impact, though, will be when capital flees the real estate sector and moves to less efficient areas of the economy. A burdensome tax, he said, means “capital will flow to other places [in the economy] that are less desirable”–meaning that if these new sectors had been the ideal recipients for capital money would have gone to them in the first place. The carried interest tax, in short, will make capital less productive.

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