Monday, September 12, 2011

Schwarzman Report

What do sex and taxes have in common?  Both depend on the definition of the word.

Blackstone co-founder and billionaire Stephen Schwarzman chose taxable income to calculate his tax percentage.  Schwarzman arrived at a 53% tax rate, 36% federal and 17% state.  However, that only applies to his $350,000 salary, a micro-fraction of his private equity underwriting (PEU) haul.

Consider information from Blackstone's 10-K, page 162.

The Partnership’s effective income tax rate was (16.20)%, (4.33)% and 0.25% for the years ended December 31, 2010, 2009 and 2008, respectively.

Blackstone's -6.76% tax rate beats The Carlyle Group's 1% tax rate in their recently filed S-1.

While searching for Mr. Schwarzman's Blackstone compensation, I ran across:
The Blackstone Group L.P. is managed and operated by its general partner, Blackstone Group Management L.L.C., which is in turn wholly-owned by Blackstone's senior managing directors and controlled by Mr. Stephen A. Schwarzman, one of its founders.

Schwarzman holds roughly 190 million shares of Blackstone, worth $2.3 billion at today's closing price.

President Obama wants to go after PEU profits, although many PEU vehicles are parked offshore.  Blackstone's 10-K had this to say:

The Obama administration has indicated that it supports the adoption of the May 28, 2010 legislation or legislation that similarly changes the treatment of carried interest for U.S. federal income tax purposes. In its published revenue proposal for 2012, the Obama administration proposed that the current law regarding the treatment of carried interest be changed to subject such income to ordinary income tax (which would be taxed at a higher rate than the proposed blended rate under the House legislation). The Obama administration proposed similar changes in its published revenue proposals for 2010 and 2011.

Over the past several years, a number of similar legislative proposals have been introduced and, in certain cases, have been passed by the U.S. House of Representatives. In 2007, legislation was introduced in the U.S. Congress that would have taxed as corporations publicly traded partnerships that directly or indirectly derived income from investment advisor or asset management services. In 2008, the U.S. House of Representatives passed a bill that would have generally (a) treated carried interest as non-qualifying income under the tax rules applicable to publicly traded partnerships, which could have precluded us from qualifying as a partnership for U.S. federal income tax purposes, and (b) taxed carried interest as ordinary income for U.S. federal income taxes, rather than in accordance with the character of income derived by the underlying fund. In December 2009, the U.S. House of Representatives passed substantially similar legislation. Such legislation would have taxed carried interest as ordinary income starting in the year of enactment. The legislation passed by the House in December 2009 and certain other versions of the proposed legislation contained a transition rule that may have delayed the applicability of certain aspects of the legislation for a partnership that is a publicly traded partnership on the date of enactment of the legislation.

That explains the PEU IPO rush.  They needn't worry, as a Republican controlled House won't pass a bill changing PEU's preferred tax status.

The PEU lobbying group sounded confident that carried interest would hold the line:

“Proposals to raise taxes on carried interest have consistently been rejected for over four years because raising taxes on investments would only sideline employers and investors and create further uncertainty in an already struggling economy,” said Steve Judge, interim president and CEO of Private Equity Capital Knowledge Executed Responsibly (PECKER).
It's a bipartisan world, where Reds and Blues love PEU's.  PECKERS donate large amounts of campaign cash.  Greedy PEU's, with their leveraged political connections, stand ready to solve America's problems.  It's like asking the Tuberculosis virus to cure lung cancer.

Update 9-18-11: quoted Yale's Jacob Hacker :  "The amount of lobbying that takes place on tax policy from the deep-pocketed interests that have the most at stake is enormous. There's very little representation on the other side. Don't forget, that members of Congress themselves, particularly senators, are well off and they're more likely to be sympathetic to the argument for low capital gains."