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Tax-Impact-On Private Equity Investment and Employment

Tax-Impact-On Private Equity Investment and Employment

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The Impact of H.R. 4213 on PrivateEquity Investment and Employment
Jason M. Thomas • June 2010
Private Equity Council • June 20101
The Impact of H.R. 4213 on Private Equity Investment and Employment
H.. 4213, Te “American Jobs and losing tax Loopholes Ac  2010” wold increase he ax rae onlong-erm capial gains income received hrogh a carried ineres in a parnership rom he crren raeo 15% o 38.5% when lly-phased in. Tis represens a 157% ax increase, or more han a dobling o he governmen’s share o hese parnerships’ long-rn invesmen income. Sch a signifcan increase inhe eecive ax rae on long-erm invesmen cold have deleerios economic conseqences.Te mos immediae economic impac o he ax increase wold likely be el in he real esae secor,which conines o ser rom low prices and high deals. Te deal rae or commercial propery morgages held by u.S. banks more han dobled in he orh qarer o 2009 and is expeced o in-crease hrogho 2010. ne in wo parnerships in America are in real esae and hese 1.48 million realesae parnerships hold more han $4.2 rillion in asses.
By comparison, he oal vale o all real esaeowned by nonfnancial corporae bsinesses in America is $6.3 rillion.
Increasing axes on real esaeparnerships redces aer-ax rerns, which cold redce he prices hese invesors are willing o bidon properies. Te likely eec is o redce prices rher, which wold increase deal raes.
Tis coldplace addiional pressre on regional banks, as insred deposiory insiions wih $100 million o $1billion in asses hold 25% o commercial propery loans osanding and 15% o all aparmen loans.
While he impac on real esae is likely o be more immediae given crren marke condiions, anohersignifcan long-rn economic eec will come rom he redcion in corporae fnance-oriened privaeeqiy invesmen. Venre capial, growh capial and byo nds channel capial o oherwise capial-consrained sar-ps, small-and-medim sized bsinesses, and larger companies in need o resrcringor new sraegic direcion. While i is exceedingly dicl o isolae he marginal impac on parnershipinvesmen behavior o an increase in an eecive ax rae precisely, invesmen and ax daa rom 1980 o2009 sgges ha:A one percenage poin increase in he eecive ax rae is associaed wih a $1.8 billion decrease inannal privae eqiy invesmen, holding oher acors consan. Tis fnding is saisically signifcana he 94% confdence inerval.A one percenage poin increase in he eecive ax rae is associaed wih a 1.07% decrease in annalprivae eqiy invesmen, holding oher acors consan. Based on 2009 invesmen levels, hiswold ranslae o a $525 million redcion in invesmen or every one percenage poin increasein he ax rae.H.. 4213, Te “American Jobs and losing tax Loopholes Ac  2010” wold increase he eecive
1 Inernal evene Service, Saisics o Income ivision, Fall SI Bllein, Ags 2009.2 Federal eserve Board o Governors, Z1: Flow o Fnds Accons o he unied Saes, B.102.3 Te mos signifcan variable or predicing commercial morgage deal is he vale o he nderlying propery in relaiono he ace vale o he morgage. See Li, Jabbor, and Green (2007).4 Bloomberg, “ommercial Morgage eal ae in u.S. More han obles,” Febrary 24, 2010.
Private Equity Council • June 20102
The Impact of H.R. 4213 on Private Equity Investment and Employment
ax rae on privae eqiy invesmen o 38.5%. Tis ax increase cold redce privae eqiy inves-men by beween $7.7 billion and $27 billion per year relaive o wha i oherwise wold have been.Tis does no sgges ha privae eqiy invesmen will no conine o grow as oal invesmen willbe inenced by many acors oher han ax raes. aher, i implies ha he higher eecive ax raecold case re invesmen levels o be lower han hey wold have been absen he ax increase.Based on relaionship beween invesmen and job creaion esimaed in he Adminisraions iniialsimls orecas, his redcion in invesmen wold case aggregae employmen o be beween36,600 and 127,800 lower han i oherwise wold have been. Te job losses wold all disproporion-aely on small-o-medim sized bsinesses. oghly 72% o all privae eqiy invesmens are made incompanies wih marke vales o less han $250 million.Tree sizeable changes o he eecive ax rae on privae eqiy invesmen have been enaced onhree occasions in he pas hiry years: 1986, 1997, and 2003. In each o hese cases, he change in heeecive ax rae had he prediced impac on privae eqiy invesmen as measred in he or yearsbeore and aer he rae change.Te ollowing secion provides a smmary o he daa and nare o he analysis. Secion hree providesa more deailed review o hree previos periods when he eecive ax rae on privae eqiy invesmenwas changed. Secion or concldes.

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