Lawmakers Seek to Clog Private-Equity Tax Leak

Wessel's Column

Read David Wessel's Wall Street Journal column.

The two top lawmakers on the Senate Finance Committee are trying to stop private-equity firms from taking advantage of a giant tax loophole. Under the current law, private-equity companies have been able to go public paying a partnership tax rate of 15 percent compared with the corporate tax rate of 35 percent. David Wessel, deputy Washington bureau chief for The Wall Street Journal, talks about the implications of the legislation with Steve Inskeep.

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STEVE INSKEEP, host:

Two key senators surprised Wall Street last week with a plan to increase taxes on a particular kind of private equity firm. It's a tax that would only apply to a couple of companies, very wealthy ones, and so this may count as one way that Congress is thinking about soaking the rich.

David Wessel, deputy Washington bureau chief for the Wall Street Journal, has been thinking about this story. And David, welcome to the program once again.

Mr. DAVID WESSEL (Wall Street Journal): Good morning.

INSKEEP: So we're talking about private equity firms. Wealthy investors who pool their money, they go buy a company. The company gets turned around. It gets sold again. That's the normal pattern. But what are these two companies that would be affected by this tax?

Mr. WESSEL: The two companies that would be affected by the tax that Senator Baucus and Senator Grassley are pushing are companies that are private equity companies but are now trying to become public; that is, sell shares to the public. One is already public, Fortress. The other big one, which wants to go public, is called Blackstone.

All companies, Wall Street companies and others, don't like paying taxes. These companies have found a couple of ways to avoid paying the taxes that other companies pay. One is they want to be treated like partnerships rather than corporations and avoid the corporate profits tax. And that's what Mr. Grassley and Mr. Baucus are trying to do away with in this bill.

INSKEEP: Those are the two senators we were talking about.

Mr. WESSEL: The two senators, right. The leading Democrat and Republican on the Senate Finance Committee.

The other thing that's in play is these private equity firms have found a way to take some of their income and tax it as capital gains, which is taxed at a much lower rate than the ordinary wage income that most of us make. And that's also in play.

INSKEEP: So these companies are getting a little bit creative and these two lawmakers are looking to close what they see is loopholes.

Mr. WESSEL: That's right. In 1987, Congress tried to fix this problem and they thought they'd fix it, this business of corporations masquerading as partnerships in order to save money. Blackstone is now going public. Going public means you have to open your books in your filings with the government.

Blackstone opened their books, everybody could see how much money they were making. Everybody could see that their founder, Steve Schwarzman, is worth $7.5 billion. This made them a very easy target. I think this is the first manifestation of something we're going to see more of, an attempt to rejigger the tax code to address the fact that the people at the top have been doing very, very well in the last decade or two. And the tax system has not reacted accordingly.

INSKEEP: You say the fact that people on the top have been doing very, very well; is it also a fact that people on the top have been doing unfairly well or at the expense of everybody else?

Mr. WESSEL: Well, unfair is in the eyes of the beholder. It is certainly true that over the last 25 years the benefits of being an economic winner have risen and they've risen a lot faster than the benefits going to people in the middle, and there have been a lot of economic losers.

And I think this is one reason why there is so much anxiety in the U.S. right now about globalization. People have this sense that people at the top are doing much better than they are. And they somehow blame globalization. And it's sort of interesting that some of the people who most believe that globalization is good for the U.S. economy, some of them even Republicans, are beginning to say we have to address this.

And one way to address it is to use the tax system to make it, as they say, more progressive, that is to take more from the rich and take less from the poor and the middle.

INSKEEP: David Wessel of the Wall Street Journal. Good talking with you.

Mr. WESSEL: You're welcome.

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