For richest few, giant tax benefits

Published June 24, 2007

Would you rather be taxed at 15 percent of your income or 35 percent? You don't have to be smarter than a fifth-grader to do that math. So for a guy as clever as Stephen Schwarzman, who turned a $400, 000 investment into nearly $9-billion as co-founder and CEO of the Blackstone Group, it's a no-brainer. His potential tax savings at the lower rate rivals the economic output of Liechtenstein, a European tax haven where his stiff-arm of the IRS might make him a national hero.

Blackstone and Schwarzman are less popular in Congress, where some members wonder why both the company and the CEO should be allowed to pay a 15 percent tax rate, at most, when other companies and CEOs in the same business are subject to a 35 percent rate. The answer is a legal loophole that means "Mr. Schwarzman's tax rate could be less than his chauffeur's, " as Wall Street Journal columnist Alan Murray explained it.

The Senate has a bipartisan bill that would close the corporate tax loophole to private equity partnerships that go public, aimed mainly at Blackstone and one or two others. That threat didn't stop Schwarzman from going forward with an initial public offering of Blackstone stock the other day, and investors gobbled up the shares, maybe because the bill would insulate Blackstone from the higher tax rate for five years. Schwarzman's take was $930-million from the IPO and a substantial stake in the company worth $7.8-billion, according to the Journal.

While competing companies are jealous of Blackstone's corporate tax advantage, other denizens of the lucrative but murky world of private hedge funds are growing nervous over another idea that is brewing in Congress. Some lawmakers (particularly Democrats) are talking about axing the personal income tax advantage hedge-fund operators now enjoy.

Most workers who get a huge performance bonus would pay regular income tax on the money, perhaps at the maximum 35 percent rate if it is worth millions of dollars. Partners in hedge funds earn their pay in the form of a bonus based on a percentage of the profit they made for their investors, but subject to a maximum 15 percent tax rate. That's because they call the bonus "carried interest, " which is treated as a capital gain rather than earned income.

While the debate over whether the loophole is fair gets pretty complicated, the outcome is of great importance to the rest of Americans who earn their money the old-fashioned way. Closing that loophole could raise tax revenues by $4-billion to $6-billion a year, according to the New York Times. And that could put money in the pockets of families with more moderate income.

Here's why: Congress is also talking about fixing the alternative minimum tax law, which is so antiquated that while it was aimed at only the richest tax avoiders, it will soon raise income taxes on nearly half of all those earning $75, 000 to $100, 000. But to fix the alternative tax and keep the budget fiscally sound, Congress will have to raise taxes elsewhere.

Judge for yourself whether it's fair to trade a lower alternative tax for elimination of the hedge-fund loophole and other tax breaks enjoyed by the superwealthy (such as transferring income overseas to avoid taxes). We think the favorable tax treatment of "carried interest" is just one of the inequities that needs to be removed from the tax code.

Of course the most influential lobbyists have showed up in Washington on behalf of the 15-percenters. If you want to even things out, you'd better contact your members of Congress and let them know that fair is fair and unfair isn't.