Why do Clinton and Trump support a policy that hurts startups?

Since startup companies have accounted for nearly all net new job creation in the last few decades, one might think that encouraging new business formation would be front and center of any discussion about the economy this campaign season.

{mosads}The sad fact is that despite some lip service given to making conditions for favorable for small businesses, the specific question of how to best help startup companies has barely been discussed.

In fact, one proposal emanating from both presidential campaigns would disincentivize investment in startups, which is precisely the opposite of the direction tax policy needs to go.

Specifically, both campaigns have proposed taxing so-called carried interest as ordinary income. The general thrust of these proposals is that moneybags big investors making a fortune in profits are taxed at a lower rate than your average working stiff taxed at normal income rates.

In fact, carried interest simply denotes the capital gains that an investment adviser receives on a business investment. Normally, that adviser gets a larger percentage of the profits the investment obtains, a standard arrangement agreed upon with the other investors because of his or her management and investment expertise. The arrangement is virtually universal, since it is the rare prospective investor in a business venture who doesn’t require a professional to advise and manage the details of financing.

While the term “carried interest” has become synonymous with hotshot hedge-fund managers who have found some sort of nefarious loophole in the tax code to avoid paying their fair share of taxes, the concept, practice and standard terms actually date back centuries. The origin of the term can actually be traced back to the captains of merchant ships in the 16th century, who took a 20 percent share of the profit from the carried goods (or “interest”) to compensate for the cost of transport and the risks of the overseas journey.

Discouraging the captain from carrying the goods and taking the risk in the venture is a bad idea if you understand that the business, along with the subsequent profits and people it employs, will not even get started without his involvement. Carried interest is currently taxed at the current capital gains rate of approximately 24 percent; taxing it as regular income, as suggested under the proposals under discussion, would result in an overall rate of well over 40 percent for most investment managers.

The result of the government taking a bigger cut from the expert investor is predictable: The adviser negotiates an even bigger cut of the profits (north of 20 percent) from his fellow investors who are depending on his expertise, leaving less profit for them and less incentive to put their money up in the first place. Why it’s a good idea for public policy to discourage people with capital to put it to work backing startups — one of the few bright spots of job creation in recent years — is a mystery.

It’s particularly mysterious when you consider that the proposed measure is a drop in the revenue bucket. Often presented as a tax reform to raise revenue, it falls woefully short in that purpose: compared to most of the other possible reforms on the table, it makes barely a dent in terms of closing the budget gap. Both the Office of Management and Budget and the Joint Tax Committee estimate that the new tax would raise a paltry $1 billion to $2 billion per year in additional revenue (total tax revenue is around $3.4 trillion).

Hiking taxes on the whole system that supports startup companies and the people who supply the capital to enable the dreams of fledgling small entrepreneurs, discouraging the formation of new companies that could employ hundreds of thousands of people, is a terrible idea. With the track record of startups in creating jobs, we should start thinking of new ways to encourage this type of investment, which winds up creating a lot more revenue for Uncle Sam, rather than figuring out new ways to skim off the top.

Robertson is CEO of Crispin Solutions, a public affairs and communications consulting firm. He formerly served as policy director for Senate candidate Ed Gillespie’s (R) 2014 campaign and was senior policy adviser for the Joint Economic Committee.

The views expressed by contributors are their own and not the views of The Hill.