Closing Private-Equity Tax Loopholes

What to make of the Baucus-Grassley

bill designed to force Blackstone, and any other partnerships looking to

go public, to pay the corporate rate of income tax? It looks very much like

the closing of a loophole to me: there’s really no reason why public "unitholders"

of Blackstone should get to keep significantly more of its pre-tax income than

shareholders of similar companies with a different corporate structure.

Blackstone’s founders, of course, have benefitted themselves from a different

loophole, and one which the new bill will not address: the fact that their income

is taxed at the 15% capital-gains rate, since they’ve managed to persuade the

IRS that it’s not really income at all, but something entirely different, called


Trying to close the "carry" loophole would be much harder, since

it affects many more people – private-equity and venture-capital professionals

across the country, rather than just those looking to take their partnerships

public. What’s more, it’ll be hard for politicians to attack those people now,

just as they’re asking for massive campaign contributions in the run-up to the

2008 elections.

And then, of course, there’s the third loophole, which is linked to the fact

that hedge-fund managers and private-equity professionals can keep a large chunk

of their income in offshore vehicles, where it can reside tax-free for years

before it is repatriated and taxed. That loophole, too, is unlikely to be closed

this side of the elections.

But especially if a Democrat ends up in the White House, it seems likely that

all of these loopholes are going to be closed sooner rather than later. A lot

of men have become dynastically wealthy partly by exploiting them, but all things

must come to an end. And there’s really no reason why hedge fund managers and

private-equity billionaires deserve the kind of tax treatment that they’re basking

in at the moment.

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