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Why Increased Equity Taxation is Self-Defeating and Wrong
#1
For years, private equity investment partnerships -- large and small -- have helped drive the economy by strengthening the companies in which they invest. But now Congress is considering legislation that would single out private equity investment partnerships for a tax increase of 133 percent, says Douglas Lowenstein, president of the Private Equity Council.

This huge tax increase could lower returns for pension funds and other investors; result in fewer investments in smaller, riskier companies; drive capital out of the USA; and ultimately restrict capital gains tax treatment to only those who already have money, says Lowenstein.


Quote:Don't tinker with success
Huge tax increase on private equity could lower investment returns.


By Douglas Lowenstein

For years, private equity investment partnerships — large and small — have helped drive the economy by strengthening the companies in which they invest, returning market-beating returns and serving as a capital magnet that draws money to the USA.

They've done it by relying on a simple model: They seek out companies that have the potential for significant growth; invest money, time, energy and talent to improve performance; and hope that the investment yields a profit when it comes time to sell.

It's a model that has worked extraordinarily well for companies such as Dunkin' Donuts, AutoZone and MGM Studios and in the process returning more than $430 billion over the past 25 years to pension funds, university endowments, charitable foundations and other investors.

Now Congress is considering legislation that would single out private equity investment partnerships for a tax increase of 133%.

Today, private equity firms' 20% profit shares (80% goes to investors) are taxed as long-term capital gains (at a rate of 15%) — just like similar profits earned by every other partnership that buys an apartment building, an oil well, a family business or some other asset, improves its value over time, and then sells it at a profit.

Some argue that private equity partners are really no more than money managers who take no risks and whose earnings ought to be taxed as ordinary income (at a maximum rate of 35%).

But money managers don't own and grow companies. They don't hire and fire senior executives. They don't sit on the board of directors.

Private equity owners do all these things. Partners not only risk their own capital, they also risk time, energy and talent.

This huge tax increase could lower returns for pension funds and other investors; result in fewer investments in smaller, riskier companies; drive capital out of the USA; and ultimately restrict capital gains tax treatment to only those who already have money.

Congress should think long and hard before it tinkers with a business model that is both equitable and fair and has delivered so much value to the nation.

Douglas Lowenstein is president of the Private Equity Council.
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#2
As far as small businesses go, this would be very destructive.

However, it seems that a number of the larger players in the private equity business like to buy out a firm, fire lots of employees (sometimes), pay themselves a huge dividend (for what, is not clear), and take on a lot of debt. (This was advantageous when interest rates were artificially low.) Perhaps later they will take the company public again, and thereby make more cash.

Now, this does not bother me if they make the company more agile and fit to survive in the modern world. However, it does bother me if they are practicing an advance form of "skimming", that is, taking out a large amount of cash from the company, paying to themselves, for no tangible benefit to the company. I can approve of shaping up a company to be better or more efficient, but I have extreme distaste for skimming.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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