The Epicurean Dealmaker has a
great argument today for abolishing the favorable tax treatement given to
private-equity principals. Let me try to summarize:
- The returns on private equity investments are calculated across all
private-equity shops, not only the best ones.
- But it’s only the best PE shops – the likes of Blackstone and KKR
– which seem to be able to consistently generate outsize returns.
- So the best way to increase private-equity returns would be to cull the
younger, smaller shops, leaving only the big, successful ones.
- Many of the principals at younger, smaller shops find their career enticing
because of the favorable tax treatment it offers: they essentially pay only
15% income tax.
- So if you raised the tax rate on carried interest, you would discourage
underperforming investors from entering the private-equity market, which would
be left to the large, long-established players with impressive overall returns.
- Which means that raising taxes on private-equity principals would increase
returns in the private-equity industry as a whole!
I’m convinced.