Two Tax Rates: One for Bigwig Investors, Another for the Rest of Us
Congress checks if billionaire investors get preferential treatment.
WASHINGTON, June 22, 2007 — -- Tonight Blackstone Chairman and CEO Stephen Schwarzman will go to bed several billion dollars richer, after his elite investment firm became a publicly traded corporation this morning on Wall Street.
The tax rate for most Americans is anywhere from 25 to 35 percent, but guess how much Schwarzman will pay.
"Most of the money Schwartzman makes is going to be taxed at the 15 percent rate," said Dan Primack, editor of PEHub.com. It's "a much lower rate than the average American business person -- and more important, the average American investor."
Congress is debating whether there should be changes in tax code so that the people who run elite investment clubs, called hedge funds or private equity firms, have to pay the same tax rates as the rest of us. But that's easier said than done since these billionaires are flexing their newly-established political muscles.
While a person's salary, considered "earned income," is typically taxed at the higher rate, money made from investments is taxed at 15 percent because of the risk.
Executives from Blackstone and other elite investing companies -- private equity firms or hedge funds -- mainly invest other people's money. But they still claim the lower tax rate because the money they make is tied to the performance of the investments.
The industry's new lobbying arm believes that's entirely appropriate.
"The touchstone is not whether you're investing equity in it or investing labor in it," said Doug Lowenstein of the Private Equity Council. "It's whether you're taking a risk."
Last week the Democratic Chairman and the ranking Republican on the Senate Finance Committee, Sens. Max Baucus, D-Mont., and Chuck Grassley, R-Iowa, introduced legislation that would ensure that private equity funds that go public are taxed at the same rate as other corporations, though the law may not take affect until 2012.
And more generally Congress will soon start looking into whether those who run heads funds and private equity firms that have not gone public are exploiting an unfair tax loophole. Hearings will be held this summer.
