Higher Taxes for Hedge Funds and Private Equity Firms??

July 10, 2007 |

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

A few weeks ago, the story surfaced that Senators Schumer and Clinton are undecided about whether to raise taxes on hedge funds and private equity firms that go public.  According to the story I read in the New York Sun, “The bipartisan proposal, offered last week by the leaders of the Senate Finance Committee, could be prickly for the New York senators, who have pushed for increased fairness in the tax code while also advocating for growth in the financial sector, which has long been crucial to the state’s economy.” 

It is interesting that this is a bipartisan proposal.  I guess the Republican senators on the committee like the idea of raising taxes too, as much as their Democratic colleagues.  And when politicians mention fairness in conjunction with the word taxes, it generally makes me uneasy. 

Evidently, the trigger for this new initiative was a result of the public attention around the public offering by the Blackstone Group — a huge New York based private equity firm.  The proposed legislation would treat all publicly traded partnerships such as Blackstone as corporations instead.  This means such firms would be subject to a tax rate of 35% on income as opposed to privately held partnerships which do not usually pay a corporate income tax.  The income “passes through” to the investors who pay whatever rate applies (often the 15% rate on capital gains).

According to the story, Senator Clinton has not yet made up her mind about the bill stating that there are ” … broad concerns surrounding private equity in relation to the rest of the market that need to be examined ….”  Really?  What exactly are these broad concerns?  The Senator’s spokesperson did not say.  Yet, we do know that ending certain tax breaks for corporations is a big (and expected) plank in the economic platform of her presidential campaign. 

And Chuck Schumer?  He would only state that he was giving the bill a review but would not comment much more than that.  But in my estimation, Senator Schumer will likely back this bill if for no other reason that he is a self declared socialist.

Yet since “the bill’s authors have cast the proposal as an effort to clarify the tax law that gives what they say is an unfair advantage to companies that seek to avoid higher rates by making public offerings as partnerships. ”… [The bill] … would apply to firms that derive their income from investment adviser or asset management services.”  In other words, this bill will penalize successful investment firms in an effort to curtail the capitalistic forces that propel their prosperity.  Nice.

The article continues by explaining that the ”push for higher taxes has come amid reports detailing the wealth enjoyed by managers in the growing private equity firm and hedge fund sector — perhaps none more so than the co-founder of Blackstone, Stephen Schwarzman, whose stake could be worth as much as $7.5 billion.”  Yup, its a crime to be rich and successful in the USA — at least according to some politicians. 

I don’t know for sure if Senator’s Schumer and Clinton will back this bill, but as I stated earlier, I would bet on it.  So, all of you start up hedge fund managers, as you become successful, keep an eye on Uncle Sam as he will most likely be looking for a larger share of your hard earned profits.

Comments