The 'Gone Public' Private Equity Tax Is Back

A lot of you probably think that urge on Capitol Hill to raise taxes on private equity companies that go public has been dampened by recent market turmoil, threats of recession, and the discovery of at least three ways of avoiding the tax. But that’s because you don’t know much about Capitol Hill.

On the Letters to the Editor page of today’s Wall Street Journal, Republican Senate finance head Charles Grassley reminds us that Capitol Hill operates on a very different planet from Wall Street. The tax won’t raise more revenue for the government? That’s not the issue. The tax may hurt the economy may depleting it of a last-resort, go-private option for troubled companies? Doesn’t bother the lawmakers. It will hurt the markets by draining at least some takeover premiums from companies with damaged stock prices? That’s just Wall Street, not Main Street. It throws a dagger at the heart of another kind of public capital formation at a time when public capital markets are under assault from regulatory burdens left-over from the business scandal outrage of the first years of the decade? They don’t care.

So what’s on the mind of the top Republican finance lawmaker? Well, it seems that it’s nothing more than a drive to tax companies because they go public, unless they are oil and gas partnerships.

[Excerpts from Grassley's letter after the jump.]

Letters to the Editor (seventh letter) [Wall Street Journal]

The legislation I've sponsored with Sen. Max Baucus reiterates congressional intent that investment advisory and asset management firms that go public be treated as corporations, just like other active businesses that decide to go public,” Grassley writes. “Congress passed a law in 1987 saying partnerships that go public will be treated as corporations, while also allowing for certain types of active businesses, like oil and gas pipelines, to keep their partnership status. Congress did not include investment advisory and asset management businesses in that exception.

Today, private equity and hedge-fund management firms that have gone public say their income qualifies for another exception, the passive-type income exception. These are not actually private equity and hedge funds; they are firms that manage those funds. These firms view themselves as engaged in the active investment advisory and asset management business, not as investment companies, and the SEC agrees with them. So to critics who claim our legislation unfairly targets these firms, the question is what other types of active businesses have tried to claim an exception intended for passive income? Our bill doesn't single out these companies. They've singled out themselves.

Grassley seems unaware that there are lots of activities that are classified as being one thing under one set of regulations and another under another set of regulations. That’s something that is inevitable in a system of mixed jurisdictions and authority that we quaintly still refer to with phrases like federalism, division of power and laws created by lawmakers. Does Grassley have any idea how far his principle—that if the SEC calls you one thing, you must be treated as that thing by every other branch of government for every imaginable purpose—would go to undermine that system?

And what kind of mirror, mirror world have we entered when Midwest Republic

We report. You deride.