If you will recall, private equity bigwigs have been trying to keep the tax rate on capital gains applied to them at 15% instead the more typical 35% by lobbying Congress. Let's just say that it's unlikely that Congress will do the politically unpopular thing of giving them a Bush-like free pass even if Bush will likely veto any move to raise the tax rate on private equity. Ultimately, things may hinge on Republican lawmakers wary of being seen as Wall Street-loving elitists as election season 2008 nears. (A two-thirds majority in Congress is required to make a 35% tax rate applied to private equity veto-proof.) A good ploy would be to set up Republican lawmakers who do not vote for a tax increase for a ballot box backlash come 2008. The Financial Times describes here the Blackstone Group's recent lobbying efforts:
Blackstone, the private equity group that went public in June, sent a senior Democratic lawmaker a confidential assessment of the potential effect a proposed tax increase would have on its books to lobby against the plan.
In a letter to Senator John Kerry obtained by the Financial Times, Blackstone warned that a proposal under consideration by the Senate finance committee would diminish its market capitalisation by $10.5bn.
Using its own results to quantify the effect of the controversial proposal, Blackstone said it anticipated that it would pay $525m a year more in taxes, while individual partners would pay $175m a year less in taxes.
Mr Kerry’s office on Friday declined to release the letter, citing a request by Blackstone that it be kept confidential.
The former presidential hopeful has emerged as a potentially powerful ally to the private equity industry, alongside New York senator Chuck Schumer, who has said the proposed legislation unfairly targets private equity firms. At a hearing on the issue before Congress adjourned, Mr Kerry compared private equity executives with other entrepreneurs who risk their own capital and therefore merit special tax treatment.
Mr Schumer is expected to introduce a separate proposal that would increase taxes on carried interest that would apply to all partnerships, including oil and gas, and real estate groups.
By broadening the scope of a potential tax hike, Mr Schumer’s expected proposal would be likely to elicit strong opposition by a broad range of corporate lobbyists.
Blackstone did not return a call seeking comment Friday. The firm’s shares were down 3.4 per cent to $24.42, well below the listing price of $31.
In its letter, Blackstone said the proposed legislation, put forward by senators Max Baucus and Chuck Grassley, the two most senior lawmakers on the finance committee, would eventually result in a “significant loss of tax revenues” for the federal government and would “inadvertently handicap one of the few industries left in America where our country is, and can continue to be, the leader on a global basis”.
Mr Grassley, the most vocal proponent of the bill, said Blackstone’s arguments did not support the idea that private equity firms were meant to get an exception to the general rule that publicly traded partnerships are taxed as corporations.
“I’ll be interested to see whether Democratic senators will pursue that policy,” he said.
“Since a Democratic senator sought this analysis from a private equity firm, maybe that shows a new interest from Democrats in making corporate America more competitive,” he added.