Private Equity: Why Higher Taxes Mean Higher Returns

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.

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