Senator Schumer plans to introduce legislation to raise taxes on private equity executives, hedge fund managers and a slew of other rich people. “My intent is to raise the most revenue and do it in a fair way,” Chuck said. “My bill will certainly raise the taxes on people who not get 15 percent for carried interest, for sure.” Though he did not share whether or not the individuals currently privy to paying only 15 percent on carried interest would have to pay 35 like normal people, he did suggest that the political wisdom that says you can’t raise taxes on the wealthy—which Schumer referred to as “old bugaboo”—is no longer valid.
In the past, Schumer’s been against any proposals that he felt unfairly singled out minorities (women, blacks, private-equity firms, hedge funds), by stripping them of their right to keep more of their money than other people. Now he claims to want to “treat everyone across the board,” and says he isn’t afraid to raise taxes on the rich in order to level the playing field. The only thing he may be afraid of is not getting an invite to Jim Chanos’s next 4th of July clambake, the last one at which he was heard saying “I’m still thinking about it,” re: taxation on HF managers and “I’ve never gotten why people would want to eat mussels. There’s too much work involved, too labor intensive. I don’t want to be breaking a sweat while I’m eating.”
Schumer Says He’ll Sponsor Tax Rise on Fund Managers [Bloomberg]
taxes
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taxes
Chuck Schumer Will Tax The Rich (But Not ‘Til After Next Year’s Election)
By Bess Levin
There’s a lot of bitching and moaning going on, of late, about how hedge fund mangers like James Simons and private equity giants like (OXYMORON ALERT:) Stephen Schwarzman* make too much money. But bitching and moaning on their own only go so far, which is why, every once in a while, there has to be a report that gives a little weight to the “it isn’t fair” argument that Schwarzman earned one hundred billion dollars last year and our compensation is one belly rub per post (and a scratch behind the ears for every “after the jump,” because page views = money, people).
Today’s (essentially) scientific study comes courtesy of the Institute for Policy Studies (IPS) and United for a Fair Economy. It found that in 2006, the top 20 hedge fund and private equity bosses (Simons, Cohen, Griffin, Schwarzman, Kravis, etc) earned an average of $657.5 million, versus the $29,544 average raked in by U.S. workers. This translates to the former making 22,255 times that of the latter. But, obviously, that’s not the best part. The report notes that the discrepancy between the two groups “dwarfs”—that’s a direct quote—the discrepancy between CEOs and workers (corporate execs, on average, earn a measly 365 times that of U.S. workers). Actually, no, that’s not the best part, which is the statistic that last year, the Top 20 earned more money in ten minutes than U.S. workers made the whole year. The blatantly passive aggressive subtext here is that there’s something wrong with this.
Douglas Lowenstein, president of the Private Equity Council reminds us that “Income disparity is an important issue, but studies driven by sound bites don’t advance a national debate about how our nation should respond” and, personally, as people who are practically deaf when it comes to sound bites, we think he’s dead right. Hedge fund lobbyist John Gaine, of the Managed Funds Association, notes that HF compensation is “fee-based and directly attributable to…performance.” Also right. Sarah Anderson, a director at IPS, decidedly not assisting us in our quest for a hat trick, criticizes the gap, and argues that Congress ought to increase the tax on private equity firm’s earnings from 15% to 35%.
Rather disturbingly, there seems to be a growing contingent in this country that agrees with Ms. Anderson. Individuals and groups who take issue with what they subjectively regard as astronomically bloated pay. People (Ben Stein, the New York Times) who have a “problem” with the so-called tax “loophole” (which, if you take off your shades of cynicism for a moment, will see is actually just a “business model”), open only to managers, and not ordinary Americans.
Thankfully, an organization known as SHAME (Southampton Alliance for Monied Estates) has its head on its shoulders and knows that hedge fund and private equity managers aren’t just like you and I—they’re better, and should be compensated and taxed accordingly. Yesterday, SHAME, in association with Concerned Neighbors of Henry Kravis, took to the streets and demanded more tax breaks for private equity kings. Rallying around Kravis’s mansion, SHAME called on Congress to let the KKR boss and other buyout billionaires with homes in the Hamptons to keep the 15% tax they’ve long come to enjoy. SHAME sang slogans like “protect the emerging plutocracy.” SHAME told DealBook, “We’re out here to help save our local neighborhood billionaires.” SHAME passed around a petition and encouraged people to defend the rights of a contingent of people that so obviously cannot defend itself.
John Carney, discussing SHAME’s motivations on the eve of the rally [CNBC]
Union takes LBO protest to Hamptons [Reuters]
Buyout Tax Debate Hits the Hamptons [DealBook]
Cash of the titans: Criticism of pay for fund execs grows [USA Today]
*I will be here—KILLING—all day.
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Private Equity
Shocker o’ the Day: Private Equity Giving Less Money To Its #1 Enemy
By Bess Levin
Are you rich? Do you want to stay that way? You are not alone. In a groundbreaking new study, the Wall Street Journal found that the 11 private equity firms that comprise the Private Equity Council are giving more money to the leading Republican presidential candidates than the Dems. Since January, Rudy Giuliani, Mitt Romney and John McCain have received $262,000 from employees of Carlyle, KKR, Blackstone, etc, versus the $231,000 thrown at Clinton, Obama and John Edwards.
The numbers represent a reversal (since 2000) from previously pro-Dem P.E. managers. What’s the impetus behind the shift? A silent message to Hill: “Bring back the headband or we’ll light this dog on fire (/not give you money, and so forth and so on)”? A newfound respect for Mitt Romney, the Porn King of the Bay State? The realization that thing just feel “so right” between you (Schwarzman, Kravis, et al) and a guy who likes to dress in drag? The desire to elect a president who prefers the number ‘15’ to the number ‘35’? It’s probably one of these things. Your guess is as good as ours (and our guess is Rudy in a mumu, if you must know).
Private Equity Gives More to Republicans [WSJ]
The other shoe has dropped.
Top Democratic congressmen introduced legislation that would doubled the tax rates on carried interest. The new tax treatment would treat the carry as ordinary income rather than capital gains. It hits everyone from venture capital funds to real estate funds to private equity firms to hedge funds.
Several prominent hedge fund managers could not be reached for comment. Presumably because they are busy moving their funds off-shore.
Fund Managers’ Taxes to Double Under House Measure [Bloomberg]
Text of the Bill [pdf file via PE Hub]
Lawmakers supporting the bill on Capitol Hill to raise taxes on private equity firms going public claim that it’s a basic matter of tax fairness. The bill’s sponsors, Democratic Senator Max Baucus and Republican Senator Chuck Grassley, have argued that private equity companies should not be allowed to access the public capital markets without having to pay the 35% corporate income tax. But the notion that private equity firms enjoy an unfair tax advantage may actually depend on a misunderstanding of how they make money and how they pay taxes.
Most private equity firms are organized as partnerships so that they can take advantage of a provision of the tax law that exempts certain kinds of partnerships from the corporate tax. Like most parts of the tax code, these provisions are written in a convoluted loophole-within-loophole style way that would have string theory physicists scratching their heads. So don’t get too worried about the details.*
One of the reasons the partnership structure is so important for private equity firms is that they make so much of their money from owning and selling operating companies—like, say, Chrysler—that are already subject to corporate taxation. If the private equity partnerships were taxed at the corporate rate, they’d effectively be taxed twice—once at the op-co level, and once at the partnership level. To make things worse, they’d really be taxes three times, since distributions to partners are subject to capital gains taxes. It seems a bit extreme to tax the same revenue stream over and over again.
Today’s Wall Street Journal editorial page, however, says that this is exactly what the Blackstone Bill would do. “Under the Baucus-Grassley proposal, Blackstone’s investment income would be taxed first at a 35% corporate tax rate on, say, American Widget Company when it earned the profits; taxed again when those profits are passed on to Blackstone at another 35% corporate income tax rate; and then taxed a third time at a 15% capital gains tax when Blackstone distributes its earnings to partners and shareholders,” the Journal says.
The Blackstone Tax [Wall Street Journal]
* If you must know, one provision says all partnerships get taxed with the corporate rate. Another provision creates a list of about fifteen different types of entities that are exempt from this treatment. Private equity partnerships fall under the exception for entities deriving income from “passive type income”—which is income from capital gains. This means that the law treats them as “pass-through” partnerships, so that the taxes don’t hit the partnerships themselves but only the owners of the partnerships. Because of this the managers of the partnerships typically pay capital gains taxes, rather than ordinary income taxes, on the profits of the firm.
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Private Equity
No Small Time Steve Schwarzmans
How The Blackstone Bill Could Cut Ordinary Investors Off From Private Equity Profits
By John Carney 
Over the past few years, the business of private equity has made a tremendous amount of money for a small number of people and institutions. And, if the top lawmakers on the Senate Finance Committee get their way, the number of people who participate in the profits of private equity isn’t likely to grow by very much.
One little noted effect of the move afoot on Capitol Hill to treat private equity and hedge funds as corporations after they go private will be to prevent ordinary investors from participating in what has been one of the biggest sources of wealth on Wall Street in recent years. The “Blackstone Bill” introduced by Senate finance committee head Baucus-Grassley would force private equity firms going public to pay the corporate tax—a huge expense that may chill the desire of firms to go sell equity to the general public.
“The little guy is going to be permanently shut-out,” one expert in corporate taxes told DealBreaker.
Until some private equity firms recently began offering funds that are publicly traded, most the prosperity of private equity over the past few years had been enjoyed exclusively by wealthy individuals and institutions that invest in the funds of the firms, and the partners who own them. The decision to go public would have let ordinary investors into this exclusive club.
But lawmakers on Capitol Hill seem intent on keeping that club exclusive, all in the name of tax fairness. Even if the tax change does not prevent the PE firms from going public (Alan Abelson of Barron’s thinks it won’t), it means that the companies the public can buy into will be far less profitable after taxes than the companies owned by the Steve Schwarzmans and Henry Kravises of the world.
Perils of Going Public [Barron's]
The move to raise taxes on private equity firms going public is the bill the launched a thousand headlines. And ten-thousand blog posts. This afternoon we looked at the possibility of the bill getting enacted and answered the most fundamental question about the proposal. We’re going to send you away into the weekend with an extended write-offs section dedicated to private equity and taxes.
Private Equity, Meet Politics
Here’s the text of the bill [US Senate: pdf]
The official explanation from the finance committee says the bill is meant to address the ‘erosion of the tax base.’ [US Senate: pdf]
Holman Jenkins says the real purpose of the bill is to address the lack of political contributions coming into Washington, DC from private equity pooh-bahs. [Wall Street Journal]
And that explains why Blackstone gets the five-year break: because he’s playing the game the way the Senators and lobbying industry want him to. Membership has its privileges. [Ideoblog]
If Blackstone did buy themselves a break from the Senate, they did it on the cheap. Blackstone employees have only given $26,100 in campaign donations to members of the finance committee over the past 17 years. [Deal Journal]
Senator Grassley thinks that access to US capital markets should be contingent on paying the corporate tax. [Finance Committee Press Release: pdf]
Jenny Anderson and Andrew Ross Sorkin say the bill is going to be called The Blackstone Bill. Which is ironic, since the Blackstone Loophole may exempt Chez Schwarzman for five years. [New York Times]
Meanwhile, Blackstone itself is probably prohibited to publicly responding to any of this because it is in a pre-IPO quiet period. [Associated Press via Houston Chronicle]
The Costs
Mary Gordon says Blackstone’s tax bill could double. [Associated Press via Forbes]
And, of course, the higher tax bill may chill the appetite for going public at other private equity firms. [DealBook]
DealBreaker Commenters notice the irony that taxing the public company at the corporate rate means private equity firms in which ordinary shareholders can invest face a bigger tax burden than private equity firms open only to wealthy investors. Sticking it to the little guy!
Details: Human Interest and Otherwise
Before news of the tax hit came yesterday, Schwarzman and other ‘stoners were pitching the company’s IPO to a standing-room-only crowd of about 600 investors at the Pierre Hotel. [Bloomberg]
When the news broke, Schwarzman was at the NYSE exchange getting an award from Yale. [Washington Post]
Schwarzman described the news of the bill as “a crisis.” [Wall Street Journal]
The Man Behind The Plan: Meet Victor Fleischer
The academic who is advising the Finance Committee on the tax treatment of private equity firms says the Blackstone IPO represents ‘2 and 20 on drugs.’[The Conglomerate]
And, yeah, he thinks the ‘carried interest’ capital gains break for fund managers should be brought to an end, too. [The Conglomerate]
But he also explains an even more twisted way that ordinary income tax could be avoided. [The Conglomerate]
Early Reactions
Percy Walker says he doubts the changes will ever reach down to tag fund managers individually. [Percy Walker.com]
Felix Salmon thinks that’s wishful thinking. All the tax loopholes are going to be closed soon, even the ability to move funds off-shore. Especially if the Democrats take the White House. [Portfolio]
Meta
The deal team at the Wall Street Journal gets all ‘war correspondent’ on us. Broadsides. Shots across the bow. Private equity bracing for an attack. (Also, we count no less than seven Wall Street Journal reporters attached to this one story. Talk about sending in the cavalry.) [Wall Street Journal]
News from Around the World
British parliament rips into venture capitalists on why they pay 10% capital gains tax instead of income taxes on the earnings of their partnerships. [Epicurean Dealmaker]
The grandfather clause and other fun stuff
Steve Schwarzman became a grandfather of twins yesterday. [DealBook]
Suggested ring-tones for Schwarzman. [Deal Journal]
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