Two Tax Rates: One for Bigwig Investors, Another for the Rest of Us

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.

"I can tell you," Grassley told ABC News, "it's this simple: If it's earned income, these people are screwing the middle-income taxpayer."

Not that anyone should expect the presidential candidates to say anything about it. They're cozying up to hedge fund and private equity firm managers.

"Presidential candidates are like bank robbers," says Sheila Krumholz, executive director of the Center for Responsive Politics. "They go where the money is."

In leafy Greenwich, Conn., last night, Sen. Chris Dodd -- a minor presidential candidate and major lawmaker as chairman of the Senate Banking Committee -- was feted with a fundraiser by Scott Cohen, the billionaire who owns the hedge fund SAC Capital.

Republican former Gov. Mitt Romney -- who used to run the private equity firm Bain Capital, where he made a fortune -- raked in $257,525 from the industry last quarter, making him the No. 1 recipient of this cash. Unless, of course, you count former Sen. John Edwards, D-NC, who may talk quite a bit about poverty, but personally was paid more than $479,000 in 2006 for a part- time job at another such firm, Fortress Investment Group.

"Do hedge funds make America any better in any way?" NBC anchor Brian Williams asked Edwards in an April debate.

"Those people in New York who work in financial markets understand -- in some ways, at least -- what can be done and can play a significant role in trying to lift people up who are struggling," said Edwards.

Added Sen. Hillary Clinton, D-NY, "I think that America is a great place because we have an entrepreneurial economy."

But most of the action these days is on the Hill.

Forget immigration reform or the war in Iraq: By many accounts, the No. 1 issue members of Congress are being lobbied on is big money urging Congress not to increase this tax rate.

ABC News asked Baucus if he thinks the 15 percent tax rate is unfair.

"It's very complicated," he said, "and we're going to dig into it very deeply and, hopefully, come up with a result that makes sense."

Changing the tax code could bring to the U.S. Treasury $4 billion to $10 billion, which some in Congress want to use to reduce taxes for the middle class -- though it's unclear if anyone's lobbying for the middle class in Congress right now.