As I have discussed in various prior postings (most are under the "distributive justice" category), there is much talk (but still little action) about the taxation of sums paid to equity and hedge fund managers as "carried interests" --profits interests in partnerships backed by little or no actual equity investment by the managers.
Now a new group is joining the discussions. The Service Employees International Union (SEIU) issued a statement accusing private equity fund managers of "hurting working Americans, risking pension returns, and cutting into federal and state revenues, while reaping hundred million-dollar payoffs and avoiding paying their fair share of taxes." Leroy Baker, US Union Attacks Private Equity Taxation, Tax-News.com, August 17, 2007. Union President Sterns called the taxation of carried interest at the ordinary income or capital gains rate just "the tip of the iceberg." Id.
The poster case used by the union is ManorCare, a health company with which the union has long had disagreements. Here's its description of the tax disadvantages for ordinary taxpayers caused by the Carlyle Group's buyout (and planned 'rip and flip') of the firm.
[The union] highlighted the Carlyle Group's purchase of nursing home giant HCR-ManorCare for $6.3 billion, stating that it expects the Group to own the company for approximately five years. ...ManorCare will receive an estimated $14 billion in state and federal tax-funded payments while it is owned by Carlyle, and CEO Paul Ormond will make as much as $186 million as a result of the deal. ... ManorCare will pay no corporate taxes while it is owned by Carlyle, cutting federal, state and local tax revenue by more than $600 million over five years, based on an analysis using "conservative assumptions". Id.
Whatever one thinks of this particular buyout deal, it is appropriate that ordinary citizens understand better the way that private equity and hedge funds work and the kinds of tax subsidies they enjoy. Bringing these deals out into the sunshine is a good idea, and having an informed discussion about the impact on the economy and on workers can only be beneficial. And hopefully Congress will redress the inequities caused by the tax subsidies--including the treatment of carried interest and the availability of the passive income exception to the publicly traded partnership rules.
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