Private Equity Firm Taxes

The Bush administration warned lawmakers not to raise the tax rate of private equity and hedge funds or their managers, maintaining that it would injure the economy and discourage risk-taking. Appearing before the Senate Finance Committee, July 11, Eric Solomon, assistant Treasury secretary for tax policy cautioned against changes. Sen. Charles E. Schumer has long been critical of growing wage disparities and of Bush administration tax policies that he says favor the wealthy over the middle class. Still he has reservations about change because tax policies “provide incentives for risk-taking and entrepreneurship, because new ideas and new businesses create good jobs.”
Let's leave the slogans behind and consider the facts. Most of the risk taking we see is in financial manipulation, not in creating new products and business. These firms such as Blackstone, the Carlyle Group, and Bain Capital seldom contribute to management, except to lay off workers, reduce benefits, and sell assets. They increase the debt of acquired firms to pay themselves rather than to build new plants. The typical practice of “quick flips,” relisting the companies within a year or two of taking them private, with more leverage, but few if any operational improvements is a “contribution to the economy that we can do without and need not reward.