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
"carry".
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.