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April 2012 Policy Study, Number 12-5

   

The Negative Consequences for Iowa of an Enterprise Value Tax

    The Problem
   

 

As part of the Obama administration’s never-ending quest for additional revenue to support their bloated spending, they have proposed an Enterprise Value Tax as part of the American Jobs Act introduced in Congress last fall. This proposal was an outgrowth of an earlier proposal to tax “carried interest” by partnerships.[3] Some analysts believe these schemes are in turn mere precursors to an even more insidious tax hike plan:

 

Ryan Ellis, Tax Policy Director for Americans for Tax Reform has pointed out that: “The ultimate goal is to raise the capital-gains rate. Starting with private equity makes it easier to raise the rates, because it takes them out of the fight later on.”[4]

 

Whether the capital-gains “next shoe” drops or not, the EVT is likely to do more harm than good. As Scott Moody, the Chief Economist of the Maine Heritage Policy Center put it “The imposition of an EVT would pull money out of the private sector, reducing working capital that would be better used to expand an already anemic economy.”[5] Alan Patricof, founder of Apax Partners, one of the largest private equity firms in the world, explains further:

 

The Enterprise Value Tax is unprecedented, punitive, and . . . will create the first class of American business that will not be afforded capital-gains treatment upon sale or transfer and will affect millions of well-meaning people. These individuals have built farms, buildings, as well as established a myriad of small companies in industries that are the job creation engine of our economic system. They have the rightful expectation that upon sale of their business – many of which have been built over decades – they will be afforded capital-gains treatment as does every other business.[6]

 

The reason the capital-gains tax system was created was to encourage individuals, corporations, and partnerships to take risks so as to create new jobs, the very aim of Obama’s American Jobs Act. However, the proposed EVT would more than double the tax rate of entrepreneurs from 15 percent to 35 percent and thus significantly decrease the willingness of Americans to take such risks. Again, Patricof explains further:

 

Congress is compounding the burden and is proposing to go far beyond any rational tax policy in what can only be described as a confiscatory manner. The proposed EVT would have far reaching negative implications for over 10 million individuals who have used the investment partnerships to run their business.[7]

 

NYSE Euronext CEO Duncan Niederauer echoes this sentiment when he stated that changing the 50-year old 15 percent tax rate on selling partnerships “could have far-reaching unintended consequences on entrepreneurism, innovation, and capital formation in the United States.”[8]

 

   

 

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