Taxing Private Equity: The Battle on Capitol Hill
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NPR's Jack Speer reports.
JACK SPEER: Bob McIntyre, the head of Citizens for Tax Justice, says these managers are taxed at a lower rate than the receptionist who answers the phone in the firm's front office.
BOB MCINTYRE: Much lower. I mean if you're an ordinary working person, you pay the Social Security and Medicare taxes for starters, which is 15 percent. And then you're either in the 15 percent or 25 percent tax bracket, so these guys are paying anywhere from half as much to a third as much as ordinary working people.
SPEER: Representative Eric Cantor, Deputy Republican Whip in the House, has come out solidly against the proposal to further tax private equity.
ERIC CANTOR: This is not just an issue for folks working on Wall Street. This really is an issue that will, in the end, impact blue jean-wearing Americans.
SPEER: Cantor, who like many of his colleagues in Congress has received campaign contributions from private equity firms, says changing the tax rate would have unintended consequences. Under the current rules, capital gains are taxed at a lower rate to encourage investment, and Cantor claims rewriting the tax code for just one type of business, private equity, will likely be just the first step for gracing the rate for everyone.
CANTOR: This really is not just about private equity. This is really about taxing innovation and job creation in America, and I think it really is the first salvo of those who wish to get rid of the rate reduction on the cap gains tax that we have in this country.
SPEER: But some tax experts believe those concerns are overblown. Victor Fleischer is a law professor at the University of Illinois who studies private equity. He says private equity managers invest other people's money, not their own. And he says they perform real work and therefore should be taxed more like a company.
VICTOR FLEISCHER: I think it's a tricky issue. I don't want to oversimplify it, but it's an anomaly, I think, when you see people getting taxed at lower rates on what at least has strong elements of compensation income, as opposed to investment capital.
SPEER: Josh Lerner, a professor at Harvard's Business School, says if they lose, private equity firms won't just pull out their checkbooks. They'll get creative.
JOSH LERNER: Instead of relying on the traditional set of compensation, could simply figure out a way where they simply assign themselves a small amount of the stock in the companies that they're financing and in all likelihood get around some of the provisions as they're laid out.
SPEER: Jack Speer, NPR News, Washington.
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