Friday Letter: Don't run, don't hide

As two separate US congressional committees disclose plans to hold private equity tax hearings, politicians in the UK limber up for a tax review this autumn.  

Private equity is to be examined by the Ways and Means Committee, the US House of Representatives’ most influential committee in terms of revenue- and tax-related policy and legislation.

In a related development, carried interest – and whether it should be taxed as capital gains at 15 percent or as income at 35 percent – will also be the subject of hearings this summer in the Senate Finance Committee, which is chaired by Senator Max Baucus, a Democrat from Montana.

Ways and Means Committee chairman Charles Rangel said in a statement: “We believe it is imperative that Ways and Means, as the committee of primary jurisdiction over tax legislation, conduct a hearing on the important issues surrounding private equity, carried interest and publicly traded partnerships.”

The Grassley-Baucus Bill has already been introduced by the Senate Finance Committee’s ranking members that would cause publicly traded partnerships to be taxed as corporations, meaning they would be subject to two levels of taxes as opposed to one.

In the UK, meanwhile, two sessions of fierce, if at times confused questioning before a group of UK parliamentarians, have left the industry in little doubt that its big battle is tax. (The BVCA’s working party, led by Sir David Walker, should head off concerns over the industry’s levels of disclosure and transparency.)

But as Tony Blair, UK prime minister for a few days more, made clear this week, tax breaks for Britain’s private equity industry raised “real issues” and pledged a review of private equity taxation by the autumn. Blair told the UK’s House of Commons during prime minister’s questions, the weekly debate: “Of course people have concerns about this, which is why we have said we would look into it in a sensible and serious way and reflect on what we can do.”

However, a question from Liberal Democrat leader Menzies Campbell on whether the “wealthiest individuals” in the UK should receive tax breaks worth £6 billion ($12 billion) a year perhaps underlined the real nature of the debate. The problem is simple: politicians on both sides of the Atlantic think private equity executives are making too much money and paying too little tax.

This is an entirely legitimate democratic concern. However, Lloyd Blankfein, chief executive of Goldman Sachs, has warned in an interview with the Financial Times of the dangers of this debate being driven too much by emotion. For the legislature in either jurisdiction simply to target the rich in the equivalent of a fiscal lynch mob would set the wealthiest to flight.

Such an outcome should not be in the interest of policy-makers in London or New York. But it is essential as never before for private equity to engage with the politics and ensure that any reviews of the industry’s tax burden on either side of the Atlantic is conceived in the round and based on solid information rather than the “argument of assertion”, as the UK’s Richard Lambert, head of the industry lobby group the CBI, has labelled the ongoing debate.

An increase in the amount of tax paid by private equity seems inevitable. The politicians should ultimately take a pragmatic, rather than punitive view, provided the industry opens up and makes its case.