There’s a lot of confusion about what taxes are being talked about here. Is it the legendary ‘carried interest’ that lets private equity managers pay just 15% capital gains tax, as opposed to the ordinary income tax rates?
The answer is that it is and it isn’t. Under the structure Blackstone has planned—considered to be the model for other firms planning similar IPOs—the entity being sold in to the public is a limited partnership that would receive distributions from other Blackstone funds and partnerships that actually do the deal-making.
Blackstone had planned to take advantage of provisions of the tax code that would allow the public entity to pay taxes at the lower capital gains rate instead of the corporate rate. In effect, they planned for Blackstone’s public face to pay taxes just like Blackstone’s individual partners do when they get distributions. This law would put a stop to that, taxing the public entity as a corporation subject to the 35% tax rate on corporate profits.
For now, at least, fund manager will continue to enjoy the 15% tax rate on their profits from buying and selling companies. But the companies they sell to the public would not.
Posted by Anon, Jun 15, 2007 5:16PM
Right, so Congress has totally mucked this up; the corporation faces the higher tax--meaning mom and pop investors--but the managers get payolla at the capital gains rate. So much for a progressive tax system. Managers have an effective income tax rate of 15% while the public will pay 15% on their capital gains on a company that is also taxed 35% on its profits. So the public gets taxed twice, once at the low rate and once at the high, while the individual managers get taxed once, and only at the low rate. Am I missing something?