Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Kill the Private-Equity Tax Break

The U.S. should raise the 15% tax millionaire and billionaire investors pay on their private equity gains to 35%—and do likewise with the 0% tax private equity partnerships pay when they go public. Pro or con?

Pro: Subsidizing the Wealthy

Despite the many areas of dispute among economists, virtually all of them would agree tax rates should not vary by occupation. In other words, we don’t want to see one tax rate for firefighters, a different tax rate for schoolteachers, and a third tax rate for bookkeepers. In principle, everyone who earns $50,000 a year should face the same rate, regardless of occupation.

Hence, most economists oppose special tax breaks for managers of private equity or hedge funds. Under their own interpretation of current law, these managers do not pay taxes on their compensation. While those of us who get regular paychecks have taxes directly deducted each month, hedge fund managers have gotten into the habit of plowing their $100 million compensation packages back into the their funds without paying any tax whatsoever. When they do eventually pull money out of the hedge fund, they typically claim it as a capital gain and pay tax at just a 15% rate.

Proposals before Congress (bills S. 1624 and H.R. 2834) would make fund managers subject to the same tax rules as everyone else. They would have to pay taxes on their income when they earn it, and it would be taxed at the same rate as normal labor income. Under these proposals, fund managers would typically pay a 35% tax rate on the bulk of their compensation.

If our government had not grown so incredibly corrupt, this one would be a no-brainer. We might want to subsidize some important jobs (albeit probably not with special tax rates) that don’t offer very high pay—for example, doctors in rural areas or inner-city schoolteachers. I doubt, however, that anyone would suggest the government initiate a policy of subsidizing hedge fund managers, some of whom already pocket $1 billion a year.

Con: Already Taxed to Distraction

There is no "private equity tax loophole." Under current law, investment income is double-taxed: First, the company you’re invested in pays the 35% corporate income tax, and then you, the investor, pay a 15% capital gains and dividends tax on what little is left. This new scheme isn’t loophole-closing—it’s just the Congressional Democrat tax increase of the week.

One bill (S. 1624) would introduce a third tax bite for publicly traded, private equity partnerships. Not content with taxing the underlying investment at 35% and the partner who owns the investment at another 15%, this bill would tax the partnership itself at 35% on top of the other two. All told, there would be a combined triple-tax rate of 64%, up from today’s double-tax rate of 45%.

The other bill (H.R. 2834) would raise the tax rate of a private equity manager’s capital gains from 15% to 35%. This would raise the double-taxation of this "carried interest" from 45% to 58%.

Who does this affect? Not the rich, who can afford fancy tax lawyers. Millions of Americans with defined benefit pensions have their retirements wrapped up in private equity firms. Ditto for college endowments and philanthropic trusts. Hiking taxes on these investments will ruin the retirement, education, and charitable hopes of millions of Americans.

This is really a not-so-subtle attack by the Democrats on the 15% capital gains and dividends tax rate that has resulted in trillions of dollars in new shareholder wealth since 2003. By picking off investors a few at a time, they want to raise all capital gains and dividend taxes to 40% or higher.

Add this to the long list of Congressional Democrat tax hikes this year—energy, tobacco, and Americans abroad are also big targets. Savers and investors, beware: Next on the Democrat chopping block is your pension.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek,, or The McGraw-Hill Companies.

Reader Comments

M Marach

Typical Grover. Dean did a good job of reducing what is a complex tax issue and bringing it to a level that people not in the tax profession can understand. Carried interest represents nothing more than a tax avoidance strategy whereby the private-equity folks enjoy paying no more than 15% of federal income tax (let alone zero payroll taxes) on what are really wages, while the wages of average citizens contribute to the tax coffers at a rate three times that (28% federal income tax + 15.3% combined employee and employer's share of payroll taxes). Grover, on the other hand, uses his arrogantly conspicuous slippery slope approach to scare those few Americans who still have pensions into believing they will somehow be affected by this legislation. This is to say nothing of his disturbing method of accounting in coming up with his preposterous figures.


I knew that Norquist is paranoid of any changes to tax laws as "a liberal ploy to rob millions of Americans to fund welfare." Now I also know that he doesn't understand basic math and this is horrible because playing fast and loose with the numbers to prove a point rooted in an emotional knee-jerk is just plain dishonesty. And while dishonesty may work in politics, it doesn't work in math.

If $1 million is taxed at 35%, the remainder would be $650,000 and the additional 15% tax on that remainder would reduce it to $552,500 making the total tax liability about 55% and not 64% as Norquist claims.

Another one of Norquist's glaring mistakes is saying that because the fund manager supposedly pays a 35% income tax rate, and then you, the investor, pay a 15% tax on the gains, this is double taxation when in fact these are two totally separate taxes applied to totally different people. If I invest $50,000 in a fund, gain $20,000, and then retrieve my money, I don't get back $38,500 after a 45% tax as he claims. I just pay the 15% tax on my earnings while the fund pays its taxes from the fees and other income it generated. So in effect, Norquist is suggesting that after you put money in your savings or investment account, you're actually loosing wealth thanks to taxes. If that was the case, why would 66% of Americans have some sort of investment in mutual funds or in the stock market?

He is also counting the 35% income tax twice in his 64% proposed tax claim. Normally I would contribute this to an oversight, but knowing Norquist's penchant for politics over math, I'm going to have to attribute it to an attempt to mislead the readers and appease those who will already agree with him that taxes are evil--like Dracula. And the evil IRS that actually has the gall to expect him to pay taxes.

So savers and investors, please do beware. You're being used as pawns in yet another partisan screaming match between think tanks. Also, if your gains are as meager as Norquist suggests (i.e. negative), I would talk to the SEC and your state attorney general if I were you.

Paying taxes is like paying rent. If you want police, firefighters, roads, hospitals, schools, and all the other wonderful, government-subsidized infrastructure that makes the U.S. such a developed and industrialized nation, the money has to come from somewhere. If Norquist really wants to reduce taxes, why doesn't he advocate a better, more efficient, less bloated government structure that removes the countless layers of various bureaucrats and forbids giving away hundreds of billions in pork barrels every year?

Oh right, because he works with a certain political party currently in power and thus doesn't want to criticize it as long as they cut taxes by 2% or 3% once in a while. You never wanna burn bridges in politics.


I guess an alternative for all of you tax-mongering Democrats would be for private equity firms to actually take direct equity interest in their investments instead of "carried interest" on the profits. This would no doubt create plenty of work for the lawyers and upset many PE firm investors, but it could most definitely be done. Maybe then you will propose increasing capital gains taxes to 35% or even 50%?


Fair taxation is the only true driver for an equitable and stable society. The U.S. tax code is officially a joke, and due to the excessive corruption within government and lobbying, the code is now unwieldy and serves those people with enough money to exploit the loopholes. The simple answer is to actually scrap the code all together; very simple, everybody pays a sliding scale of tax, no exemptions, no special interest groups, no trust funds to protect the rich--and the only groups eligible for exemption are charities. At this stage, I am already hearing the screams that this will destroy businesses and innovation, but surely not; it just evens the field for everybody. I mean, isn't that the central tenet this country was founded on, a fair playing field and competition, not protection. Or was it "free competition only if I have an advantage first." Why should wealthy people be able to create trust funds? They have enough money to provide for their children. Therefore the trust is to reduce their tax or protect their assets in case they go bankrupt. Neither of these reasons is acceptable for the creation of these vehicles.

As for the private equity players and the associated taxation arguments above, I find Grover's arguments quite amusing around the double taxation laws and companies etc. The main platform of a PE takeover is to purchase the business and utilize an increased amount of debt within the balance sheet to fund the purchase. From Economics 101, as you increase the debt, you increase the repayments, and therefore lower the profits of the business. The PE guys are hoping they can increase the value of the company for a resale. However, during this period the actual taxes paid plummet as the interest expense on the borrowed amounts reduces the taxable profits. So the real value (and income) for the PE play is the capital growth from reselling the business. They effectively mortgage taxable corporate profits over a three-year period (at 35%) for a one-time capital gain (taxed at 15%). Where is the fair playing field in that, Grover?


Actually, David, PE firms already make direct equity investments. The problem is that the managers of these firms put in a tiny fraction of the capital they use to make the investments and take out a quarter to a third of the profits or more. I don't have any problem with that, because they do a lot of hard work in between, but the proportion of their return in excess of their investment is not investment income; it is compensation for services. Therefore, it should be taxed as such.

I don't think the PE partnerships should be taxed. The investors are already subject to taxes on their investment returns, all of which are legitimate investment returns, and many of the investors are pension funds, philanthropic trusts, university endowments, etc., as Norquist points out.

The problem with the 35% on the "carried interest" or a manager is that part of that interest is legitimate investment income. However, I do agree that the portion of the "carried interest" that is in excess of the manager's proportional investment should be taxed as compensation, no more and no less than the compensation earned by anyone else.


Why is it that Norquist always must politicize the debate?

"Next on the Democrat chopping block..."

Doesn't language like that just smack of external bias? Asserting which party is more likely to do this or that simply distracts from the merits of the specific issue at hand.

The authors should stick to the question asked--just because we're on the opinion pages doesn't mean that propaganda is acceptable in every instance.


To Random,
You claim that Mr. Norquist's math is "playing fast and loose with the numbers"? I'd recommend that you tend to your own before you begin attacking someone else's.

Let's look over yours:
"If $1 million is taxed at 35%, the remainder would be $650,000 and the additional 15% tax on that remainder would reduce it to $552,500, making the total tax liability about 55% and not 64% as Norquist claims."

This would be a perfectly reasonable objection--if you had actually read Mr. Norquist's piece. He states that the 64% is reached by the current double-taxation of 35% plus 15% plus the proposed triple taxation of an additional 35%. You even point this out yourself later but attribute it to malicious intent from the evil Grover Norquist. Playing fast and loose with the numbers? You're going well beyond that; this is fast and loose with the English language. I'd be willing to attribute it to an oversight, but you clearly have an axe to grind, so I'm inclined to say it's an attempt to deceive.

Now then, as for your claim of double taxation being a myth: I could be wrong on this, but when double- (or soon possibly even triple-) taxation is being discussed, it's not being claimed that any single entity is paying all the points of taxation. What's being taxed multiple times is the money itself. And that's why you are losing wealth when you invest; not actual wealth, such that you're getting less back than you used to, but potential wealth--wealth you would have gained had the government not stolen it. That's why so many Americans invest money. They still get returns on their investment; those returns are simply much less than they should be.

And as for all the government subsidized infrastructure that makes our nation great, you'll have to forgive me. In the America I've been living in, our status as a great, developed, industrial power was the result of a free market that provides economic incentive for success. But perhaps there's a second America where the public schools don't churn out incompetent students who can barely read and government subsidies haven't stagnated the market, preserving certain industries at the cost of successful developments revolutionizing the whole market. If such an America exists, I gladly leave it to you.

And for some reason I have trouble believing that Norquist is working with the party in power. After all, the current party in power has been pushing for increased taxes all over, untouchable earmarks, and all sorts of other costly measures. Maybe the Democratic party in your America has cut taxes, but the one here certainly has not.


Mark, it is a group of Democrats who have proposed the tax hike. Baker's argument is typical uninformed pandering to stir up resentment from the uninformed public. Most people have no idea (and clearly neither does Baker) how a PE firm actually works, and why going after it on the basis of "high salaries with tax breaks" is not only incorrectly stated and improperly presented but also has clear implications of changing the rules of capital gains for everyone. Whether they make a lot of money or not is really irrelevant to begin with. Not all PE firms are the likes of Blackstone & KKR. These funds earn income with money tied up in risky private investments for years. While they do make agreements that sweeten the deal for the managers, the money earned by carried interest is still capital gains of a long-term investment. If the investment fails, they get nothing. While most people only hear about billion-dollar leveraged buyouts of the likes of Hilton Hotels, many funds act as catalysts for entrepreneurs who are expanding their businesses and the fund is assuming risk alongside the business owner. Why tax them any differently than someone who starts a business and sells his or her equity to an investor?


The math is sound. Let's take several scenarios:

Scenario One (Current Law): The underlying investment pays a 35% corporate income tax. Only $0.65 of the original $1 of corporate profits remain. This $0.65 is then taxed to the shareholder at 15%, whether as a capital gain (if the after-tax corporate profit is retained and shares are sold) or as a qualified dividend (if the after-tax corporate profit is distributed). Fifteen percent of $0.65 is $0.0975. Add together 35% and 9.75%, and you have 44.75%. That is the integrated, total tax on investment income under current law.

Scenario Two (S. 1624): The underlying investment is taxed at 35%. The after-tax corporate profit (whether in the form of dividends or capital gains) is taxed at a new, partner-level 35%. Finally, the partner himself pays 15%.

There are two separate rates here. If the income is a capital gain, the tax cascading is 35-35-15. Do the math on that, and you end up with a combined, cascaded rate of 64.0875%.

If the income is a dividend, there is a special 70% "dividends received" exclusion. This results in a cascaded rate of 35-10.5-15. Do the math on that, and you end up with a combined, cascaded rate of 50.55%.

Scenario Three (H.R. 2834): The underlying investment pays a corporate income tax of 35%, and then the general partner pays a special capital-gains tax rate of 35% on his carried interest capital gains.

The cascading there is 35-35. Do the math, and the rate is 57.75%.

One can excuse Mr. Norquist for rounding, I would hope.


The numbers are still not right if we consider the fact that different entities are being taxed; they get distributed to partners in ways that can shelter them from taxes (giving a bonus of stock effectively annuls the taxes for the chunk of payment given in stock), and different entities pay different taxes on different amounts. My calculations and those used by Norquist were far too simplistic to reflect the real situation, I admit. Different amounts are being taxed every time.

There are also serious logical errors with this cascading line of thinking-- for one, assuming that when you invest money, the fund pays a 35% income tax on your investment. This is not the case. The funds pay on the income from fees and consulting services. And yes, the fact that different entities pay different amounts on different sums matters. An investment firm paying a 35% tax rate on $1 billion in annual EBIT is very, very different from your paying a 15% tax on the $200,000 you earned on your investment with that fund. And again, the fund is not paying for the money you gave it up front.

Kevin's argument that Americans loose money when they invest because the government "steals" it and that Americans invest because they get a return on their investment is like saying that when someone takes away half your money, you can still make 20% or 30% gains on your wealth, which is well...impossible. How could Americans be losing wealth and yet making money by investing in a money-losing venture?

Finally, the idea that Republicans haven't cut taxes as per Kevin's comment just isn't right. Earmarks and pork barrels are examples of government waste of our tax money and not extra taxes. The only hidden Republican tax is the GOP's refusal to address the AMT, which will have the net effect of a drastic tax hike over the next few years. Norquist's group had a few articles about this, but they have abandoned this key theme in search of more glamorous topics.


One thing: Since when do partnerships pay any tax at all? Hedge funds do not pay tax, because they're set up as partnerships anyway, so Grover's double-tax argument already has a major hole in it. Hedge fund managers are getting away unfairly by paying lower tax on what is complimentary. That is just wrong and corrupt, and I am glad it's coming to light.


The Democrats have proposed taxing publicly traded partnerships.


Random, you are wrong and confused. Kevin has said everything I wanted to say, only better.

Join the Debate


Participate More!

Please send us your ideas for new Debate Room topics. If you're an academic, association officer, or other industry expert and would like to write a Debate Room essay, send us a query. Questions? See the Debate Room FAQ.

E-mail The Debate Room

BW Mall - Sponsored Links

Buy a link now!