On Tuesday, President Obama announced that “we’re proposing a complete elimination of capital gains taxes on small business investment.” (Only for a year, but still. It’s a bold, interesting move.) It’s clear now that proposal was not taken to heart by the House of Representatives. The very next day, the Democratically-controlled House voted to more than double that tax rate, changing it from 15% to 35%, reclassifying these gains as ordinary income. The increase will also affect private equity fund managers, as well as managers of real estate and oil-and-gas partnerships.

As the Wall Street Journal reports, “the new 35% rate applies to what is known as “carried interest,” which is income that only materializes if fund managers wisely invest the fund’s capital and only after other investors in the fund have benefited. Venture and private equity fund managers already pay normal income taxes on their regular salary derived from management fees. The carried interest, no sure thing, represents a capital gain on a successful investment and has therefore been taxed that way.”

Even better, the whole thing was couched as an addition to a completely unrelated research & development bill. House Resolution 4213, otherwise known as the Tax Extenders Act, is billed as legislation that “renews a crucial research and development tax credit, as well as tax credits for middle class families and teachers.”

And lest the whole thing be dismissed as scaremongering by News Corp., the Coalition on Human Needs highlights the bill in their report from that week, and the press release from the House of Representatives is right here.

This is the kind of thing that has to stop. In the press release, it states that “the bill, which is deficit neutral, is paid for by closing tax loopholes that allow investment fund managers to pay a lower tax rate than other Americans, and by empowering the Treasury Department with new tools to crack down on tax evasion.”

Let me address our elected officials for a moment: Friend Representatives, reclassifying a category of income is not closing a loophole. It is not even a ‘crackdown’ on tax evasion. This is rejiggering the books, pure and simple, and to hide it in this manner is shameful, and wholly unacceptable. I do not expect all our elected officials to be economists, or even well versed in economics or investment-related things. However, when attempting to pass a resolution of this nature, some education is paramount to the creation of quality legislature. So if I may – a capital gain is a profit that comes from the investment into a capital asset, such as stocks, bonds or real estate. It is the very result of the axiom “buy low, sell high.”

Unless one wishes to claim that a fund manager is employed by the very companies they invest in, then this is not regular income and should not be classified as such. It’s basic stuff, really, but the need for clarification is apparent – so I’m just doing my part, my civic duty.

Thankfully the bill is only through the House, and it’d be great if this thing is nipped in the bud. But if the President is serious about stimulating small-business growth, especially in science and technology, then he needs to make that capital gains elimination permanent, instead of a mere one-year tease, and take steps to ensure that this kind of tax increase does not, and will not happen under his watch.

After all, the goal is to grow the economy, not frustrate it.

Update, May 2010: I wrote the President about it, and I got a response back. This is what it said.

Dear Friend:

Thank you for writing to me.  I appreciate hearing
from you and value your input.

Each day, I am moved by the messages I receive
from people across the country.  Far too many Americans
are struggling–falling behind on mortgage payments,
coping with illness, or losing a job without warning.  My
Administration is working to address the serious challenges
our Nation faces.  I am committed to taking immediate
steps that generate job creation and economic recovery, and
I am determined to make investments that lay a new
foundation for real and lasting progress.

As I move forward on key initiatives, I am making
my Administration the most open and transparent in
history.  Part of delivering on that promise is hearing from
people like you.  I take seriously your opinions and respect
your point of view.  Please know that your concerns will be
on my mind in the days ahead.

I hope you continue to explore
www.WhiteHouse.gov, which is regularly updated and
more interactive than ever before.  Thank you again for
writing.

Sincerely,

Barack Obama

I’m not entirely sure he read my letter.