Kill the Private-Equity Tax Break

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Dean Baker
Debate Room (BusinessWeek), July 11, 2007

The U.S. should raise the 15% tax millionaire and billionaire investors pay on their private equity gains to 35%—and do likewise with the 0% tax private equity partnerships pay when they go public. Pro or con? Dean takes the pro side, Grover Norquist takes the con side.

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Despite the many areas of dispute among economists, virtually all of them would agree tax rates should not vary by occupation. In other words, we don’t want to see one tax rate for firefighters, a different tax rate for schoolteachers, and a third tax rate for bookkeepers. In principle, everyone who earns $50,000 a year should face the same rate, regardless of occupation.

Hence, most economists oppose special tax breaks for managers of private equity or hedge funds. Under their own interpretation of current law, these managers do not pay taxes on their compensation. While those of us who get regular paychecks have taxes directly deducted each month, hedge fund managers have gotten into the habit of plowing their $100 million compensation packages back into the their funds without paying any tax whatsoever. When they do eventually pull money out of the hedge fund, they typically claim it as a capital gain and pay tax at just a 15% rate.

Proposals before Congress (bills S. 1624 and H.R. 2834) would make fund managers subject to the same tax rules as everyone else. They would have to pay taxes on their income when they earn it, and it would be taxed at the same rate as normal labor income. Under these proposals, fund managers would typically pay a 35% tax rate on the bulk of their compensation.

If our government had not grown so incredibly corrupt, this one would be a no-brainer. We might want to subsidize some important jobs (albeit probably not with special tax rates) that don’t offer very high pay—for example, doctors in rural areas or inner-city schoolteachers. I doubt, however, that anyone would suggest the government initiate a policy of subsidizing hedge fund managers, some of whom already pocket $1 billion a year.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.