I enjoyed Michael Kinsley's comments.

Private-Equity Pigs.

... The private-equity gents may truly believe the world is a better place if they pay less in taxes. But they surely know that their case is not obvious or airtight, and it looks just awful. To be specific, they look like pigs. Worse, they look like unpatriotic ingrates who won't share with their country even a fraction of the blessings that it has bestowed so spectacularly on them.

Maybe these characterizations are unfair. If so, these guys are truly fools. They are trading away something they crave (respectability) for something they have no conceivable use for (more money). They are not fools like the plutocrats who cursed the New Deal while it saved capitalism. American capitalism is in no danger. They are fools who, in search of dignity, give their gangs ludicrous Savile Row names like the Blackstone Group and the Carlyle Group. They plaster their real names on the walls of institutions dedicated to culture, health and other noble things, all in efforts to sanitize their money. Or--let's not be cynical!--in sincere efforts to show gratitude and share the wealth a bit. And then they still end up having to wonder whether every stranger they pass on the street is thinking: What a selfish jerk.

and

I don't even mind that these players discovered and exploited a loophole to reduce their tax bills. No one is under any moral obligation to pay more taxes than he or she legally owes. (And I hope the lawyer or accountant who figured out how Blackstone could call some of its income a capital gain when calculating its taxes and then relabel the same pile of dough as ordinary income when computing its deductions, as reported last week in the New York Times, got a big, big bonus.) For years, these folks got away with murder. Congratulations. But then, when the sheer size of their incomes draws unwanted attention, instead of a sheepish grin and an "O.K., you caught us," they decide to use the power of their money to keep the racket going. At that point, I think, Who cares how many cultural centers these guys may have financed? Screw them

The Senate bill, as I understand it, only applies to publically traded investment partnerships (like Blackstone post its IPO).  It would tax their earnings as corporate income, instead of allowing the earnings to be passed through to investors and taxed as their own cap gains.

The idea is not to favor one public entity (the new Blackstone) over another (eg, Goldman Sachs, Merrill Lynch, etc...).

The bill would not effect private partnerships.

Does Steve Forbes talk honestly about taxes? To hear him talk you might forget he inherited both his wealth and his business. Unfortunately the left does not seem to grasp the reality of taxes either.

For operators of businesses including investment business, I head a number of real estate investment entities, as long as the marginal tax rate allows you to keep more than you would otherwise the taxe rate should have very little impact on the willingness to proceed. It certainly is not clear why those who make their living in investments should not pay ordinary income tax rates as everyone else who earns a living does.

However, it is also clear that in terms of raising money taxes do matter, or rather net rates of return matter. Captial needs to be taxed at lower rates than labor because investors don't have to part with their money but in order to grow the economy needs the investment. Labor has no choice to either work or starve.

There are a lot of reasons to tax capital at lower rates than labor. There is no justification for taxing work at differential rates regardless of what one does.

Daniel A. Greenbaum

According to the Kaplan and Rauh study Brad Delong reported , I posted here and David Brooks misreported ,the top 25 hedge fund managers appear to have earned more than all 500 S& P CEO’s combined. My guess is that “earned” meant ‘after a tax rate of 15% ,or zero'. .Whatever.

What interests me is what this says about the stage US capitalism has reached when those 25 people , using other people’s money to buy control blocks in various companies , earned more than those 500 managers who were actually creating something- or at least had authority over the millions of workers who put in the billions of hours required to turn iron , copper and other stuff like that into the things the rest of us use to get through the day: the coffee maker , the car or bus to work , our clothes , the TV we watched at night… the gross domestic product , if you will.

Let us assume they’d been abruptly removed from the scene on Jan 1 2006 when a low flying meteor wiped out the skiing in Vail , and them. Would there have been one fewer car produced ? One less microwave ? One less criminally TV program about a disfunctional New Jersey family ?.

Forget about it.

The only thing that would have changed would have been that the compensation which found its way into their bank accounts would have stayed in other people’s .

Those 25 white , male , ivy league graduates (want to bet? ) contributed nothing , zero , to the process of creating real things the rest of us use. Worse , for the most part they employed those control blocks to impose “efficiencies” on their targets i.e. to generate short term profits at the expense not only of the workers , fired or stripped of their benefits , but also of the future of the companies and of all of us .

Question: what do you call the hedge fund manager who encouraged development ? “Waiter !”.

And where does all their compensation come from since there is no such thing as a free lunch ? In the first place from their fans : other investors . Those hedge funds didn’t magically “increase in value” . They increased because new investors paid higher prices for the shares of those more “ efficient” companies .

Which meant that someone had to suffer : those new investors when the shares later tanked , the workers made “redundant” as part of the “restructuring” , or the future economy because of R&D not done .

In short we’ve become a country whose highest rewards go to the counter-creators . To those whose fortunes are the direct result of the impoverishment of the rest of us.

Luckily, the general public will not have the time or the background to listen to the likes of Mr. Forbes and his fellow apologists. The idea of $1+ billion paychecks being taxed far less than a teacher's salary is likely to carry the day.

As for those apologists, they are correct. One penny removed from the pockets of the investor class is, indeed, one less penny available for investment. It removes a penny of incentive and that penny just might be the shortfall that prevents the success of the next Google.

If that redaction of the argument seems exaggerated, then the question becomes: "At what point does the money involved in a taxation issue begin to interfer in meaningful ways with the markets?" As the above comments indicate, even relatively savvy lookers-on can only provide their "feeling" as to whether a tax change will effect the market and to what extent. The only authoritative numbers are generated by scholastics (or interested parties) and interpreted by interested parties with media access.

Don't these facts drive the argument right where it belonged from the first? The economic Neocons (read: "Ayn Randians") believe that investors should not be taxed. This not being immediately achievable, in the present "Communist" atmosphere, they seek, through lobbying and (other) obfuscation, inasmuch as possible to prevent taxation from being effective. The Progressives find nothing "Communist" about being socially responsible, and argue, not that it won't affect investment, but that it is unconscionable to undertax billions of dollars while millions of Americans cannot afford basic health care.

Is there any issue for which it is more important to command the high ground? To reply to numbers with numbers (or, even less effective, educated guesses) is to lose the battle before it even starts. Some investment capital will be lost. The amount will be quite small in terms of the market as a whole. Nuff said. Time to get to the issues involved.

As for private equity companies and hedge funds going off-shore, that is a genuine concern, in relation to any number of issues, which we do not seem to be taking sufficiently into consideration at this point. A tax-free Dubai is building office suites at a rate that suggests they expect a booming market for years to come. Call it the Progressive's Achilles' Heel.

Your point, Tom, is well taken that the penny doesn't simply disappear but gets used. Another related point is that the government is going to raise it's money one way or the other. If it takes less from investors, then it's going to tax wages (or something else) at a higher rate. So there are really two issues to consider--where the tax money is raised and what effect transferring that tax cost from one group to another has--and where the tax money is spent and what effect transferring that spending from one purpose (private investment) to another (government spending) has.

Taxing investors at a lower rate means taxing wage earners at a higher rate. And this reduces consumption as well as investment among wage earners. So any increase in investment (and investor's consumption) gained by reducing capital gains taxes is at least partially offset by a reduction in the consumption and investment of wage earners.