The Enterprise Value Tax would hit firms that have nothing to do with ‘carried interest.’
As it has in years past, Congress is now considering changing the tax rules regarding “carried interest,” a kind of investment earnings often taxed at a rate lower than that of ordinary income. This matter will doubtless be resolved politically, as there is no clear right or wrong answer economically. To paraphrase Churchill, messy fighting among lobbyists, lawyers and demagogues is the worst way to settle such things, except for all the other ways.
But tied to the discussions of carried interest is another debate that, if resolved incorrectly, would mean the enactment of a pernicious and economically destructive new tax.
We are referring to the Enterprise Value Tax, which is inserted (in slightly varying forms) into the congressional proposals to “fix” carried interest and into the White House’s American Jobs Act proposal. Under current law, entrepreneurs of all types who sell their companies are taxed on the profits at the capital-gains rate. The EVT seeks to change this, but only for the sale of certain businesses—namely investment-service partnerships, the sale of which would now be taxed as regular income.