The investment profits of private equity firms are fairly taxed as long-term capital gains because private equity partners act as owners, not employees; bear significant economic risks; ho
The investment profits of private equity firms are fairly taxed as long-term capital gains because private equity partners act as owners, not employees; bear significant economic risks; hold the businesses they acquire as capital assets; and do not benefit from any tax code ‘loophole,’ the chairman of the board of directors of the Private Equity Council told Congress.
In a hearing before the House Ways and Means Committee, PEC Board Chairman and Carlyle Group Managing Director Bruce E Rosenblum said the current tax treatment of private equity investment profits is consistent with the tax treatment of real estate, energy, small business and many other partnerships, and is consistent with the treatment of capital gains generally.
‘There is no justification for treating capital gains allocated to private equity sponsors less favorably than other capital gains – including those earned by other successful investors and businessmen, whether they be Warren Buffett, Bill Gates or persons of more modest means who have successfully invested in the stock market or a small family business,’ says Rosenblum. ‘As long as one believes that taxing long-term capital gains at a lower rate is sound tax policy, something Congress has affirmed repeatedly, there is no ‘inequity’ in the current taxation of capital gains attributable to carried interests.’
The Private Equity Council opposes legislation that would significantly raise taxes on private equity investment firms because it would undermine an industry that has made a major contribution to the American economy by strengthening companies and delivering superior returns to pension funds, university endowments, charitable foundations and other investors. HR 2834 would tax profits earned by private equity firms on the sale of long-term investments at the regular income rate of 35 per cent instead of the long-term capital gains rate of 15 per cent.
Rebutting allegations that the current private equity taxation regime represents a ‘tax break for the rich,’ Rosenblum said that, in fact, it is the private equity tax bill sponsored by Rep. Sander Levin (D-Michigan) that would create an environment that would favor the affluent – by requiring that investment partners receive capital gains tax treatment only in proportion to the amount of money they invest in a business, regardless of their investments of time, energy and talent.
If the tax change is enacted: ‘Only those who are in a position to provide significant risk capital – and not those who build these businesses through their ideas, vision and effort – will be in a position to derive significant benefit from differential long-term capital gains rates,’ Rosenblum testified.
That is one of the reasons that minority- and women-owned investment firms have joined to establish the new Access to Capital Coalition, Rosenblum added.
He quoted leaders of the coalition as saying that the proposed tax increase on private equity ‘could impose a significant financial burden on minority- and women-owned investment capital firms, both with respect to their profitability and maintaining and improving their access to investment capital…’
Often overlooked in the debate over private equity taxation, Rosenblum said, are the significant contributions that private equity investment firms have made to the American economy. ‘Private equity investment is about … entrepreneurial firms, large and small, located in all parts of the United States, that are integral to capital formation and liquidity in this country,’ he said.
