Taxes on private equity partners are equitable, fair, Private Equity Council chairman tells Congress
WASHINGTON, DC, September 6, 2007 — 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 today.
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,” Rosenblum said.
“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,” Rosenblum added.
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 percent instead of the long-term capital gains rate of 15 percent.
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 said.
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,” Rosenblum said.
In his testimony, Rosenblum addressed the major arguments advanced by proponents of the private equity tax increase, saying:
• A carried interest is not the equivalent of a stock option — Stock options arise from an employer-employee relationship. But a private equity firm is not an employee of its limited partner investors, and the carried interest simply represents the terms of ownership created by the founders of a private equity fund at the inception of the venture.
• Recipients of carried interest bear significant economic risks — Private equity firms and their partners invest substantial amounts of their own capital in their funds and also risk the time and energy they devote to investments that may in the end yield no profit.
• Private equity funds and their partners own capital assets — A private equity fund and its partners do not supply services to their partners; they are co-owners of a capital asset who are entitled to long-term capital gains tax treatment when the asset is sold at a profit.
• Private equity sponsors do not benefit from loopholes — Private equity partnerships are taxed in exactly the same manner and at exactly the same rate as all other partnerships that buy a capital asset, increase its value and sell it at a profit.
• Tax fairness does not require treating carried interest proceeds as ordinary income — The current tax treatment of carried interest for private equity firms and partners is fair, equitable and consistent with the tax treatment afforded to all similar business ventures.
About The Private Equity Council
The Private Equity Council, based in Washington DC, is an advocacy, communications and research organization that develops, analyzes and distributes information about the domestic and international private equity industry. Its members are: Apax Partners; Apollo Global Management LLC; Bain Capital; The Blackstone Group; The Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Providence Equity Partners; Silver Lake Partners; THL Partners and TPG Capital (formerly Texas Pacific Group).
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