Obama plan: Higher taxes on private equity

September 12, 2011, 11:33 PM UTC

Obama explains how his jobs bill will be paid for. Private equity will not be happy.

Earlier today, The Blackstone Group (BX) CEO Steve Schwarzman offered “an olive branch” to President Obama, writing that he would be willing to share economic pain. It only took Obama a few hours to take Schwarzman up on his offer.

The White House today laid out a series of moves to pay for the $447 billion job-creation package he proposed last week during a special joint session of Congress. Among them is a change to the tax treatment of carried interest, or the percentage of profits that a fund manager takes home. Today, fund managers pay the capital gains rate of 15% but, under Obama’s proposal, it would be increased to an ordinary income rate that, for most fund managers, would be around 35%.

This would apply to those managing funds in asset classes like private equity, hedge, venture capital, real estate, timber and oil & gas.

As regular readers know, I support this change. And, to be sure, many Term Sheet readers disagree.

At the same time, however, I remain extremely skeptical that Obama’s proposal will become law. Remember, the first bill to change carried interest tax treatment came long before Obama was elected president. And then he ran on a platform that included the carried interest change, but has been unable to get it passed during more than two years in office. The suggestion that he’ll be able to do it now, in an environment where Republicans are loath to accept any type of tax increase, seems more optimistic than realistic.

Already, the Private Equity Growth Capital Council, of which Schwarzman’s firm is a founding member, has come out in opposition. Steve Judge, the trade group’s interim president said:

“Proposals to raise taxes on carried interest have consistently been rejected for over four years because raising taxes on investments would only sideline employers and investors and create further uncertainty in an already struggling economy.”

Never mind that private investment was doing just fine when capital gains rates were higher, or that fund managers have a fiduciary obligation to their limited partners (whose taxes wouldn’t change), rather than to their own tax bills. Or that I’ve still been unable to find a PE or VC fund manager who would leave the market were their tax rate to rise.

No, this is no longer about arguments. It’s about politics. Raising taxes on wealthy fund managers is good for Democratic stump speeches, and holding the line on taxes has become Republican orthodoxy. In other words, neither has too much of an impetus to change the status quo. Until that paradigm is altered, expect this to become just another footnote in a carried interest debate that has gone on for way too long.

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