As an investment strategy, making private equity and hedge fund managers rich is a probable loser. As a tax policy, it is a guaranteed one.
The U.S. House of Representatives passed a bill last week that would raise the taxes that private equity and other investment managers pay on "carried interest," their share of the takings when a holding such as a startup or turnaround is sold at a profit.
Carried interest is currently taxed at the lower capital gains rate, meaning that many private equity barons can pay less in tax than the people who clean their swimming pools or mind their children. This is patently unjust. Carried interest is compensation for labor, earned income in other words, rather than gains on capital that might be lost.
As you might expect, the private equity industry is not happy:
"Remember we manage money for union employees, for corporate employees, for teachers, firemen and the like and our job is to help these unions and pension funds protect their employees when they retire. This is why private equity needs to have the treatment we have to attract the best and brightest to this sector." Robert L. Johnson, of private equity firm RLJ Companies told CNBC television.
"Many state pensions and corporate pensions are terribly underfunded. You take away the some of the incentive on this industry and its going to backfire on the people who need pensions when they retire."