What if We Didn’t Tax All of Carried Interest?
Now, Democrats want to cobble together what will likely be a failed attempt at a tax increase on all of private equity’s carried interest. Aaaagain. But they’re not seeing the forest for the trees.
Well, particularly, the big, ugly monstrosity of a tree that stands to make most of the other trees look sleazy by comparison, that is, the dividend recapitalization. The dividend recap is one of the less savory things about PE, and lawmakers would be wise try to increase the tax rate of money derived from those transactions, rather than for all private equity deals—not that I expect a pack of legislators, some of whom came to Washington armed with little more than a limited worldview and a community college degree, to try to comprehend this unprompted.
For one, it forces good management, and basically tells private equity managers: “You can run this company to profitability? Fine, you get taxed at a lesser rate. Even if you cut jobs? Fine, you get taxed at a lesser rate. But if you just load it up with debt and make its financial structure a burden onto the organization itself, then haul ass with a profit and leave something behind that bleeds jobs, you better believe you’re going to take a hit.” Even if a PE firm can dividend recap its poor, huddled portfolio to the exits, a more heavily-taxed revenue stream will be unappealing to LPs, who will also take note of the borderline irresponsible fiscal management....MORE