Last week, on the eve of private equity giant Blackstone Group LP announcing that it would go public, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill that would dramatically alter the taxation regime applicable to private equity firms that are publicly traded.
Sound innocuous? Don’t be fooled—the Baucus-Grassley legislation is bad news—and not just for those rich venture capital types that most of us envy.
Currently, capital gains accruing to publicly-traded private equity firms are taxed at 15%. However, if Mr. Baucus and Mr. Grassley have their way, these partnerships will pay 35% tax on capital gains—just like corporations do, despite the fact that the law says a partnership is not a corporation.
The Baucus-Grassley plan looks appealing to those who see private equity as a vulture industry, which operates by partnership, despite its corporation-like behavior-- all in a nefarious effort to avoid paying tax. But setting aside that private equity firms organize as partnerships for many non-tax-related reasons (and muddying the waters between partnerships and corporations is legally troublesome), there is one big reason why the Baucus-Grassley plan should be stopped.
Contrary to popular perception, private equity firms contribute a great deal to our society, which ought not be overlooked—or nixed, purely on the basis of whether a given firm chooses to sell stakes to investors on a public, as opposed to a private, market.
Recently, private equity giant Cerberus decided to pursue a purchase of General Motors, an organization in dire financial straits, which happens to employ several hundred thousand workers, and carry responsibility for the pensions of several hundred thousand more. It is an investment that I hardly imagine that Joe Shareholder would be prepared to make—yet it is an important one.
Many of General Motors’ employees and pensioners work and live in economically downtrodden Michigan, where unemployment runs at 6.9% (2.4% higher than the US national average). If General Motors went under, which Cerberus may single-handedly prevent, many of those workers would struggle to find jobs in one of the worst economic climates in America. In addition, the pensions of former GM workers could be put in jeopardy. Ultimately, those workers and pensioners could end up reliant on government handouts—no good thing, for them, and no good thing for taxpayers, who would ultimately carry the can for increased welfare distributions, initially via the diversion of money from other important programs (perhaps education, perhaps transportation), but in a grave situation, very possibly via increased taxes, as well.