Rising the tax on the carried interest of investment partnerships would reduce assets of pension plans by no more than two basis points a year, Alan J. Auerbach, economics professor at University of California, Berkeley, said at a Senate Finance Committee hearing today.
Mr. Auerbach, law director of the university’s Robert T. Burch Center for Tax Policy and Public Finance, testified that changing the carried interest tax to ordinary income from capital gains, raising the levy to up to 35% from 15%, was unlikely to raise the costs of investment partnerships by more than 20 basis points a year. He said the amount of money pension funds invest in partnerships is “only a small portion of all pension fund assets.”
“If half of the tax increase were shifted to investors, this tax burden would imply a reduction of at most around two basis points in the annual return on these pension funds’ assets, and quite possibly less,” Mr. Auerbach said.
Also at the hearing, Russell Read, CIO of the $247.7 billion California Public Employees’ Retirement System, Sacramento, said he didn’t know what impact a change in the tax law might have on pension plan returns. “We know it (an increase in the tax on carried interest) will have some effect,” Mr. Read said. “How large of a factor is an open question.” He also said CalPERS was not likely to take a position on any tax legislation, viewing lobbying on tax issues as being out of the pension fund’s purview.
After the hearing, Robert Stewart, spokesman for the Private Equity Council, Washington, said that nobody really knew what impact raising the tax on carried interest would have. “I’ve heard what I believe to be well-informed speculation that the number could be far greater (than that estimated by Mr. Auerbach),” Mr. Stewart said. “All I know is that some pension professionals have expressed concerns that this could have significant impact on their returns.”
Separately, the National Conference on Public Employee Retirement Systems, Washington, dropped its opposition to the carried interest legislation. The association had previously argued the legislation could have a negative impact on pension plans.
“While some of our members feel that the bills could affect the public plan community, the majority of our members do not share that opinion,” Robert D. Podgorny, NCPERS president, wrote in a Tuesday letter to the Senate panel.
