Private Equity and Tax Equity
You wouldn’t know it from Washington Post reporter Jeffrey Birnbaum’s news story covering yesterday's House Ways & Means Committee hearings on the carried interest tax loophole, but the House bill to close this loophole is rapidly gathering momentum, as objections to the measure are being met with convincing rejoinders.
The bill, introduced by Rep. Sander Levin (D-MI), would end the special tax break that allows private equity fund managers to pay 15 percent capital gains tax on their compensation for services and costs all other taxpayers billions of dollars a year. Everyone else pays the ordinary tax rate of up to 35 percent on such income.
In fact, the big news of the day was that the Democrats on the panel were unequivocal in support of the bill. Considering that four of them represent New York--and that Rep. Thomas M. Reynolds, the only Republican from New York on the committee, said the bill would "further undermine New York's position as the preeminent financial center in the world"--the key development yesterday was the unanimous support for the bill expressed by the Democrats. Yet Mr. Birnbaum made no mention of it in his article.
Birnbaum has lavished attention almost exclusively on the arguments made by the U.S. Chamber of Commerce, the Private Equity Council, and industry lobbyists in defense of this loophole. The Chamber of Commerce published a report this week concluding that “increasing carried interest taxes would reduce the amount of long-term capital available to the U.S. economy and undermine investment, innovation, entrepreneurial activity, productivity, growth and the ability of U.S. companies to compete in the global market.” Sounds dire.
The private equity lobby is trying to portray the Levin bill as an attack on private equity itself. Of course, the bill does not raise taxes on private equity, or venture capital, or hedge funds, or any entity, for that matter.
Trying to even the media coverage of the hearing, Jonathan Tasini, the Labor Research Association Executive Director, quotes the testimony of a managing partner at a private equity fund--Leo Hindery Jr.--who testified at yesterday's hearing:
[T]he argument that the tax increases would hurt the economy is "self-serving" and "complete poppycock... the industry had taken advantage of a "tax loophole the size of a Mack truck."
(Incidentally, this perspective also didn't make it into Mr. Birnbaum's article.)
More importantly, it's not so much the private industry that has been ripping off taxpayers, but a small group of employees--the fund managers--the exclusive beneficiaries of this special tax break. When a member of the Ways and Means panel asked the witnesses what the average pay among hedge fund managers is, Tasini writes, a silence fell. Piped up one witness: "millions... $500 million."
Are these people truly the neediest--or the greediest?
Comments (4)
The arguments against the Levin bill make it seem as though higher tax would somehow deter or punish investment. The OMB watch paper rebuts this well and thanks for posting it. The argument falls apart because investors are paying the gross fees of the managers, not the fees net of tax. A change in the tax rate of the managers would have no effect on the amount that investors would be willing to pay in fees. The only scope for adverse economic impact would be if the existing managers would not be willing to work for the new net fees...of an average of hundreds of milllions of dollars(!) AND no one else would be willing to step in and take the job...for an average of hundreds of millions of dollars(!). I think the economy is safe if the bill passes and the cause of tax equity will advance just a little tiny bit.
Now if we could only tax increases in capital wealth the way we tax wages, our tax rates could drop like a rock and the rich would be taxed as much as the working classes. But don't count on that happening soon.
September 7, 2007 3:11 PM | Reply | Permalink
Money protects itself well these days, so this is a non-trivial success, if nothing blocks it at the last minute.
September 8, 2007 5:20 AM | Reply | Permalink
Gee, the Democrats standing up against a tiny set of over-fed, porcine special interests? I'll believe it when I see it. The Pubic-ans had these guys campaign contributions automatically; the current bunch need to scare them into contributing. I hope I'm proven wrong, but I'm guessing the whole issue will go away with a few satchels of cash laundered through whomever is replacing Hsu.
September 8, 2007 11:47 PM | Reply | Permalink
I live in New York City and these arguments that closing this tax loophole will somehow hurt New York are BS. New York City residents are already taxed higher than most anyone in the country because we pay city, state and local taxes on income as well as city and state sales taxes, not to mention other fees. Nobody moves their business to New York City because they're looking for a tax break. If tax breaks were the only factor that business people took into account, then all business people would go only to Texas and New Hampshire, which don't have state taxes on income. But those states are... not the most desired locations.
Both California and New York are high tax states. But, both state governments offer a lot of services (which offset a lot of the tax pain) and both are also hubs for media and for market exchanges (which offer savings despite the taxes).
I just can't think of a way that taxing carried interest at income rates would hurt New York in any way. Heck, even the phrase "carried interest" is deceptive since it describes payment for work. Why can't an iron worker claim their income is "carried interest," because I don't see the difference?
thosethingswesay.blogspot.com
September 9, 2007 7:12 PM | Reply | Permalink