Leaders of the tax-writing committees in Congress are considering a new proposal to end a little-known tax break that has allowed wealthy financiers who run private equity firms and hedge funds to cut their total income tax bills by billions of dollars, aides to lawmakers say.
The proposal would have a far broader effect than more modest legislation introduced last week by Senate tax writers to increase taxes on private equity firms that go public. That bill covered only a handful of firms, including the Blackstone Group, the private equity firm run by Stephen Schwarzman that is planning to sell shares to investors tomorrow.
By contrast, the new proposal would affect many more firms and could raise $4 billion to $6 billion annually. It may be attached to a tax bill expected as early as July as a way of helping offset the cost to the Treasury of relieving the growing burden of the alternative minimum tax on large numbers of taxpayers, aides said.
The sudden interest on Capitol Hill in increasing taxes on wealthy private equity and hedge fund operators is already running into a storm of opposition from the firms potentially affected and from other lawmakers closely associated with Wall Street. (editors note some of these "people" "stole" over $100 million a year in wages while exporting working class jobs)
But even if the recently introduced legislation on publicly traded partnerships does not gain traction, it is clear that tax writers are homing in on a potentially valuable pot of money that could be used to offset other initiatives.
At the heart of the newest proposal is an attempt to bar private equity and hedge fund operators from a longstanding, but little understood, practice that has allowed them to pay a lower capital gains rate of 15 percent instead of the ordinary top income tax rate of 35 percent on their performance fees, which typically represent most of their annual income. (editors note the average injured vet will recieve much less then $4000 a month.)
The industry argues that the portion of profits they receive from investments should receive preferential treatment because of the risk involved. But critics contend that the fees are effectively bonuses because private equity firms have little, if any, of their own money at stake.
This tax break has helped add to the record level of wealth among hedge fund managers, who invest pools of money from wealthy individuals and individuals in a variety of activities, and private equity executives, who use their investments to acquire control of publicly traded companies. Private equity executives alone took home more than $45 billion in pay in the past six years, compensation which has also been fueled by strong equity markets and higher-than-market returns for the top performing funds.
A change in the tax code could also fall on venture capital firms, real estate partnerships and many oil and gas companies — all of which use similar accounting to justify paying the lower tax rate.
Among the lawmakers currently considering the idea of eliminating the capital gains advantage are the chairman of the Senate Finance Committee, Max Baucus, Democrat from Montana, and Charles Grassley of Iowa, who is the ranking Republican. Together, they introduced the bill last week on publicly traded firms.
Representative Charles Rangel, a Democrat from New York who is chairman of the House Ways and Means Committee, is also looking at the issue and said yesterday that he plans to hold hearings after the July 4 recess.
“It gives advantage to some people depending on how they set up their tax structure,” Mr. Rangel said in a telephone interview, “and we believe that’s not how it should be.”
Raising taxes on performance fees, which are known as “carried interest” on Wall Street, would generate billions. Another possible source of increased tax revenue would be a cap on offshore tax deferrals. (editors note; what a good idea)
Already, an army of lobbyists is lining up to stop such proposals, including the U.S. Chamber of Commerce and the Private Equity Council, a recently organized group to represent the industry.
“This is the No. 1 issue all offices are getting lobbied on right now,” a senior aide in the Senate said. “Carried interest is billions; publicly traded partnerships is millions.”
Kohlberg Kravis Roberts & Company, a firm that became famous for its leveraged buyout of RJR Nabisco in 1988, has several high-profile lobbyists in its employ, including Kenneth B. Mehlman, the former chairman of the Republican National Committee, who is now a partner at the Akin Gump Strauss Hauer Feld law firm.
Blackstone has been working with Wayne Berman, managing director of Ogilvy Government Relations.
Any actual legislation on the issue is expected to be positioned as a way to offset reduced revenue from the alternative minimum tax, or to help pay for the State Children’s Health Insurance Program or to extend the education tax credit.
“The story will be ‘Tax the wealthy private equity guys to make sure kids go to college, or to help kids in poverty,’" the aide said.
Still, it remains unclear how far any proposal will get. Already, the legislation on publicly-traded partnerships is drawing fire.
Yesterday, Senators Christopher J. Dodd, Democrat of Connecticut, and Richard C. Shelby, Republican of Alabama, who serve as the chairman and ranking member of the Senate Banking Committee, asked the chairman of the Securities and Exchange Commission and the Treasury secretary to look at the impact the Baucus-Grassley legislation on publicly traded partnerships could have on the markets.
Three Republican presidential candidates have said they are against the idea and are expected to line up against any farther-reaching efforts. “I don’t like raising taxes at all,” Rudolph W. Giuliani said on CNBC this week. And business representatives have said they are worried that any tax bill could stifle American competitiveness.
“We are concerned about how quickly this is moving without real consideration to the implications it would have on our tax policy and on the competitiveness of our markets,” said Michael Ryan, executive director and senior vice president for the U.S. Chamber’s Center for Capital Markets Competitiveness.
On the other hand, the A.F.L.-C.I.O. has expressed concern to the S.E.C. that Blackstone will not be registered as an investment company. “There’s a compact between hedge funds and regulators — stick to rich people and we won’t subject you to intense scrutiny,” Heather L. Slavkin, a legal research analyst in the A.F.L.-C.I.O. office of investment, said. “When you go to mom and pop, that’s when the regulators need to step in.”
Several unlikely members of the business community have also questioned the present tax advantages for private equity firms, among them Robert Rubin, chairman of the executive committee of Citigroup, whose clients include many private equity firms.
Mr. Rubin, the former Treasury secretary, said he was speaking for himself rather than Citigroup. He suggested that the issue should be looked at “with great seriousness” by the appropriate tax committees in Congress.
But industry lobbyists defended the practice as essential to the way private equity firms operate.
“At this moment, the single most important issue for us,” said Douglas Lowenstein, president of the Private Equity Council, “is ensuring that the current — and we believe correct — treatment of carried interest as capital gains is retained."