Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
BY RACHEL BECK
THE ASSOCIATED PRESS
NEW YORK — There is nothing like watching politics at work. Even though private-equity firms and their managers are paying much lower taxes than their corporate counterparts or lower-earning average citizens, that might not change so soon if certain lawmakers have their way.
Some big names in Congress, including Sens. Charles Schumer and John Kerry, aren’t convinced yet they should support legislation to increase the taxes that publicly traded buyout firms and hedge funds pay on their profits to as high as 35 percent from the current capital-gains rate of 15 percent.
They contend that closing that tax gap would hurt U.S. competitiveness and stifle entrepreneurship. But their opposition might have more to do with the campaign contributions that could go missing if their powerful constituents faced higher taxes.
Momentum for a tax hike has been building in Washington in recent months, largely set off by Blackstone Group’s move to become one of the first private-equity firms to go public.
In its prospectus this spring ahead of its June IPO, the company detailed that founder Steve Schwarzman had made nearly $400 million last year. Since much of that money came from “carried interest” — the 20 percent cut of profits from investments managed by the buyout firms that they claim for themselves — a two-decades old tax provision allowed for it to only get taxed at the capital gains rate, not as income.
Corporations, in turn, have a double layer of taxation: They pay income tax at a rate of 35 percent and investors in them pay 15-percent capital-gains taxes on their profits.
Lawmakers worry that others might follow Blackstone’s lead, meaning there could be a wave of financial firms reorganizing themselves to take advantage of the tax provision. And they surely have taken note that Blackstone’s secretaries face potentially higher tax rates on their salaries than Schwarzman and other top brass pay on carried interest.
Legislation has been introduced in the House that would boost the tax rate for managers of those private partnerships. A Senate bill would raise taxes on publicly traded financial partnerships like Blackstone, but does not address the carried interest issue.
“We need to be able to look every taxpayer square in the eye and say — whatever they do, whatever kind of work or service — that we don’t differentiate,” said chief sponsor of the House bill, Rep. Sander Levin (D-Mich.).
But gaining support for such legislation is turning out to be more difficult than many thought it would be. That’s largely due to the full-court press being mounted by private-equity firms, which have hired more lobbyists and doled out more political contributions in recent months.
They want this issue to stall — and from the looks of things right now, their effort may be paying off.
At least that was the way it sounded at a Senate Finance Committee hearing last week. Democrats seem divided on this issue, caught between the need to raise revenue to pay for new government programs and the big political contributions that come from industries most affected by such change.
Schumer, a New York Democrat, has declined to take a position on this issue. Last week, he did lay out some of the pros and cons. On the positive side, he noted that if Congress needs to boost revenues, the “likely and logical place to do it should be at the very highest end of the income scale, where average tax rates have actually been declining.”
But with New York being a home base to many private equity firms and hedge funds, he acknowledged that his “phone has been ringing quite a bit lately.” And he noted that he wants to ensure that New York and the United States “remains the pre-eminent financial center in the world.”
Then he dropped the real spoiler, something that could keep such legislation from going anywhere fast. He said it would be unfair for financial partnerships to be taxed at a higher rate than other partnerships, in sectors like oil and gas and real estate partnerships. Just imagine how drawn out the legislative wrangling would be if other partnerships then faced higher taxes, too.
“This isn’t to say that we should make no changes to how carried interest or hedge funds are taxed, but we should treat everyone fairly and everyone equally,” Schumer said during the committee hearing last week. Representatives for Schumer did not return requests by The Associated Press for further comment on the tax issue.
His Democratic peer from Massachussets, John Kerry, also has expressed caution about making any changes that could slow the flow of venture capital to startups in his home state. In a statement to the AP, he noted the importance of considering how such changes would affect the growth of new companies, job creation, entrepreneurship and real-estate investment.
“We’re all aiming to make the tax code fair, but we should ask the tough questions now and proceed with caution to avoid unintended consequences,” he told the AP.
Such comments had to please those at private-equity and hedge funds, who have showered the Democratic Senatorial Campaign Committee — of which Schumer is chairman — with at least $576,250 since the start of this year, according to the Center for Responsive Politics. No party committee or leadership political action committee has received more from these industries than the DSCC.
Without the backing of such major players in Congress, the likelihood of the legislation getting anywhere fast looks a lot more murky. That means that private-equity firms, hedge funds and their managers likely will hold on to cushy tax privileges.
Remember that next time you check the deductions taken out of your paycheck.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org