Saturday, September 9, 2017

Decade Long Canard: Taxing PEU Carried Interest as Income

Republicans and Democrats threatened for the last decade to tax private equity billionaires at the same rate as their secretaries.  The American public, long finding this practice abhorrent, stood ready for elected officials to eliminate this enrichment loophole.  Serious debate occurred in 2007 and 2010.  Candidates Barack Obama and Donald Trump promised they would address this inequity.  Obama didn't and the Trump administration is walking back its commitment.

There's something odd in this debate.  Private equity underwriters (PEU) more than doubled assets under management (AUM) over the last decade from just over $1 trillion in 2006 to nearly $2.5 trillion in mid 2016.  Despite an 115% growth in PEU AUM projected proceeds from changing the law fell 42%.  It dropped from $26 billion in 2006 to a current projection of $15 billion.  What?

This faulty math fits with Carlyle co-founder David Rubenstein's longstanding discount of changing tax law.   Flashback to Congress' last serious attempt in this arena when Rubenstein lobbied hard to retain private equity's preferred taxation.  The NewYorker reported:

On June 8th, (2010) Rubenstein’s cell phone rang as he was speaking to supporters of the Economic Club, at the Phillips Collection. He left the stage to take the call. Among those in the audience was Gary Shapiro, the consumer-electronics lobbyist who was Rubenstein’s travel companion to Japan in the eighties. After a few minutes, Shapiro recalls, Rubenstein returned and said, “That was a senator. That one call just saved us on carried interest.
And it was a bipartisan save.  A major financial reporter wrote:

I watched a video interview of Rubenstein and his arrogance is really beyond tolerance. He was going on about the debt ceiling problem and how there would need to be cuts in services and higher taxes. When the reporter asked him about tax on carried interest he turned really disdainful and said that this "only" amounted to $22 billion over some number of years and this was not serious money. Boy, nothing like everybody doing their small part to save the country from oblivion!
Fifteen billion, that sounds like serious money even for Carlyle.  Washington Business Journal reported:

Private equity juggernaut The Carlyle Group (NASDAQ: CG) is looking to bust through the record for the biggest domestic buyout fund ever — and it's aiming for $15 billion, according to Bloomberg News.

If the D.C.-based firm is successful, it would be the biggest domestic buyout fund — larger funds have been raised for overseas buyouts — topping the $13.9 billion KKK & Co. fund raised in March.
Obviously, Mr. Rubenstein has different definitions for serious money.  His record on not wanting to pay taxes is long and clear.  He has spoken them to many politicians, most of whom call back.  In Washington D.C. money talks louder than the will of the people.