What is it about politicians in Washington that they just can’t stand progress or the thought of anyone getting rich?
That’s the attitude of many Democrats in Congress as they try to cripple the private equity and venture capital industries with higher tax rates. These financers are some of the most dynamic risk-takers on the economic playing field. They are disrupting the old stodgy banking and Wall Street financing networks.
The PE and VC track records in funding small businesses and turning them into the future gazelles is almost a uniquely American success story.
But now, thanks to the industry’s winning track record in saving companies and jobs and making people rich, Washington thinks they are doing TOO well and wants to raise the tax rate on the industry by nearly 50%.
They want to slay the goose that’s been laying golden eggs for decades.
How golden? Last year alone, PE firms invested $350 billion of risk capital in companies ranging from everyday manufacturing to construction to cutting-edge artificial intelligence.
These investment firms don’t just provide the flow of dollars; they provide the critical management expertise that enables the firms to thrive. Academic research has shown that when companies take private equity investments, they are more innovative and rise in value.
They employ 13.3 million people in the United States while generating $1.1 trillion in wages and contributing $2 trillion to the nation’s gross domestic product. They also contribute $223 billion in federal tax revenue.
For investors, such as pension funds and foundations, returns have been generally higher from PE and VC funds than from investing in publicly traded stocks.
How are these deal-makers villains? You’d have to ask Bernie Sanders and Alexandria Ocasio-Cortez.
When PE and VC firms invest in companies and add value to their operations, they take a portion of the gains. This “carried interest” arrangement aligns the incentives of the new investors with the old. When these firms succeed in creating significant new shareholder value, they are well compensated.
No one in the industry has a problem with this. But some Democrats in Congress want to charge the investors personal income tax rates of up to 39.6% instead of the 24% capital gains tax.
A new study by Charles Swenson, a professor at the University of Southern California, shows that implementing the tax changes being pushed by Democrats would trigger nearly 700,000 job losses in the private funds industry over a 10-year period, as well as “a long-run net annual loss of up to $9.93 billion in Federal tax revenues.”
That’s right. The proposal could LOSE revenue for the Treasury.
Some in Congress complain that these investors are really raiders overly focused on get-rich-quick schemes, including selling off the assets and closing businesses. That happens sometimes with fraudsters, but it’s the exception, not the rule.
The entire structure of the PE investment is to reward long-term success due to the equity feature of the terms. As part of the 2017 Trump tax cut deal, the industry agreed to a three-year holding period of the stock for the managers of these funds to qualify for the lower capital gains treatment on the appreciated value of the companies they invest in and advise.
In most stock acquisitions, the holding term is only one year for capital gains tax treatment.
This provision was a fair compromise and should be made permanent, just as the entire Trump tax reforms of 2017 should. The goal of the Trump 2.0 tax bill should be to encourage more investment by keeping tax rates low and not raising them.
Stephen Moore is a visiting fellow at the Heritage Foundation. He is also an economic advisor to the Trump campaign. His new book, coauthored with Arthur Laffer, is “The Trump Economic Miracle.”
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The problem, as usual, is the income tax. We shouldn’t be taxed on our income. In fact, we shouldn’t be compelled to disclose our income to the Federal government; it’s private financial information and should remain so. The answer to most income tax problems is the Fair Tax, which would replace it with a much more efficient sales tax on consumption. The huge and expensive IRS of today would no longer be needed. Everyone would pay his fair share, and no more; if you make the purchase, you pay the tax. No more obnoxious filing of a tax return every year. Why do so many states have a sales tax? Because it’s a better system of taxation. Why do many states not have income taxes? Because it’s a terrible system of taxation. Why are so many middle-class families leaving those states that have income taxes for states that don’t. Because income taxes are destroying their standard of living.
the opening question of this column should read “what is it about politicians in Washington that they can’t stand progress or the thought of anyone BESIDES THEM getting rich?
We all know that Democrats want to destroy America from within. I have seen this from the Democrats since about 1965. I lived through the Carter Era with double-digit interest rates and gas lines at the pump. The Democrats want a repeat performance as they dismantle America. I hope that America learned its lesson and vote these politicians out now and in 2026 & 2028.
The politicians don’t have a problem with anyone getting rich as long as it is them.It’s us the basket of deplorables that must learn to do more with less.
If you want less of something tax it if you want more of something subsidize it. How hard is that to understand?
Come on Mr. Moore. Trump wants to close the carried interest loophole too, not just AOC and Bernie. And why shouldn’t we? If we’re going to tax private equity, venture capital and hedge-fund managers at the capital gains rate, why not others? How about small-business owners who took risks, have been successful and are paying at the top marginal tax rate? Tax expert Steve Rosenthal had a great comment on the carried interest loophole. “Everyone wants to close it, except private equity executives.”
I hope someone is reading this to Congress, of at least sending this to them.
Democrats and other government worshippers want to bring the maximum amount of money into their church.Obviously,they can’t get it from their poor constituency,so they go after those who have behaved the best,by working hard,studying,getting rich,while growing the wealth of the country,Democrats punish good behavior,by overtaxing those who do the best and earn higher incomes,while rewarding sloth,laziness and bad behavior.