Blackstone: Paying Normal Tax Rates

Heidi Moore, liveblogging the Blackstone conference call, picks up on something interesting:

Puglisi tackles taxes. Regulators, are you paying attention?

Here is what he says: “While our tax rates for the full year were approximately 15% for the fourth quarters of 2007 and 2006, our effective tax rates were 31% and 10% respectively. The higher effective tax rate for the fourth quarter of 2007 is attributable to carried interest unrealized losses. Basically, the income that flows up to the partnership levels that are subject to corporate level taxes are our management and transaction fee revenues,and in this fourth quarter, those items accounted for more than 100% of total revenues due to negative performance-base.”

Last year, when lawmakers were aiming squarely at the low taxes paid by private-equity funds, the problem was simple: while they might pay normal tax rates on the "2" part of their 2-and-20 compensation structure, the "20" part was taxed as "carried interest" and therefore only at 15%.

Except in the fourth quarter of 2007, Blackstone lost $170 million, so all its income – and then some – came from its taxed-normally management fee, rather than from its low-tax performance fee.

It seems like now might be a good place to revamp the tax structure for private-equity firms. If their performance is underwater and they’re not getting any performance fees, then a tax hike on those performance fees won’t affect them for the time being. But no, I’m not holding my breath on this one.

(I know it’s more complicated than this, and that I’m eliding two separate issues: the taxation of private equity companies, on the one hand, and the taxation of private-equity general partners, on the other. But if I had my druthers I’d tax them both at normal rates.)

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