Private equity faces a tax increase. Again.
Well, that sure didn’t take long.
Just days after Mitt Romney acknowledged that his effective tax rate was approximately 15%, Congressman Sander Levin (D-MI) announced plans to reintroduce legislation that would close the so-called “carried interest” loophole.
For the uninitiated, carried interest is the percentage of investment profits that a private equity fund manager receives (the remainder — typically 80% — goes to the private equity fund’s actual investors). It currently is treated at the 15% capital gains rate rather than ordinary income rates, and also is exploited by fund managers in the venture capital, real estate and hedge fund spaces.
I say “exploited” because the relevant tax laws were not written to benefit or encourage private equity. In fact, they predate private equity. Instead, early private equity investors dove into their tax law books, found the most lucrative structure to base their industry around and went to work. For more on why this is an improper loophole, read my Case for Raising Taxes on Private Equity.
But back to Levin and his bill.
The Michigan Congressman first tried getting people to pay attention to this issue in 2007, at the apex of what The Carlyle Group’s David Rubenstein called the “golden age of private equity.” And he even got it through the House of Representatives a few times, but it kept dying in the Senate. Lots of roadblocks: A threatened veto from then-President Bush. GOP dogma about how all tax hikes the devil’s work. Democratic Senators stuffing the measure into sure-to-fail bills, as a way of saving face with constituents (hey, I voted for it) while keeping rich donors happy (hey, I killed it). And a massive financial meltdown in which private equity wasn’t on the list of contributing factors.
But now Romney’s candidacy has brought the issue back to the forefront, and Levin is hoping that this time he’ll have the momentum to get his bill passed:
“Gov. Romney’s statement that his tax rate is close to 15 percent likely reflects that he has benefited from a loophole that we have been trying to close for years,” Levin said in a prepared statement. “In 2007 I introduced legislation to close that loophole and it has passed the House four times as part of broader measures. When Gov. Romney says his tax rate mostly reflects returns on his own investment, he needs to clarify how much this is truly money that he invested himself and how much is carried interest income that he earned managing other people’s money. Conflating the two is at the heart of this tax equity debate.”
Romney has said that he opposes a change to carried interest tax treatment, while Obama has repeatedly supported such a move. In other words, this is an actual policy dispute between the two likely candidates — and one that will certainly get much more media attention in 2012 than it did in 2007.
But don’t expect Levin’s bill to actually pass this year. Not with Republicans still controlling the House, and the GOP’s standard bearer the loophole’s most famous beneficiary. It seems to work better for both sides as a political football, even though doing so allows the tax game to remained rigged.
Sign up for my daily email newsletter on deals and deal-makers: GetTermSheet.com
