Blackstone IPO: Should Firms That Invest for the Rich Pay Lower Taxes Than Other Businesses?
Blackstone pays significantly less in taxes than other types of corporations.
June 21, 2007 — -- Private equity firms have grown into a massive force on Wall Street, moving around billions of dollars, mostly under the radar.
But now as the Blackstone Group is about to go public -- with an IPO expected to rake in more than $4.14 billion -- new scrutiny is being paid to this secretive world, particularly to the amount of taxes private equity firms pay.
To the surprise of many, private equity funds, including Blackstone, pay taxes at the 15 percent capital gains rate instead of at the 35 percent income tax rate most corporations face.
The issue surfaced on Capitol Hill last week when Sens. Max Baucus, D-Mont., and Chuck Grassley, R-Iowa, introduced legislation that would force publicly traded partnerships to pay taxes at the higher corporate rate.
The difference could mean billions of extra tax dollars for the federal treasury. But changing the rate could also hamper strong economic growth attributed to private equity dumping so much cash into the business world.
Just because the corporate tax rate is 35 percent doesn't mean companies actually pay that much. Just as individual taxpayers do, corporations often find ways to lower their taxes.
To encourage certain public policies, the government gives various tax breaks. For instance, to encourage home ownership, the government allows individuals to write off interest on mortgages. Other deductions are given for each child or dependent.
Companies do similar things to cut tax bills. They'll write off depreciation, capital investments, take advantage of research and development tax credits or keep profits earned in overseas markets in those countries. All of this is legal.
At the end of the day, most companies don't pay anywhere near the 35 percent rate.
For instance, General Electric paid a 9 percent effective tax rate on earnings last year, according to ABC calculations based on data from the Securities and Exchange Commission. Hewlett-Packard paid 13.3 percent, McDonald's, 28.3 percent. Walt Disney the parent company of ABC, paid 30.7 percent and Microsoft, 31 percent.
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