March 28, 2024

DealBook: White House Rankles Wall Street With Enterprise Value Tax

President Obama at North Carolina State University.Doug Mills/The New York TimesPresident Obama pushed for his jobs plan during a rally on Wednesday at North Carolina State University.

8:00 p.m. | Updated

Private equity executives and hedge fund managers are apoplectic that President Obama has included a provision in his jobs bill that they are calling punitive and discriminatory.

Buried on Page 139 of the American Jobs Act is a measure that would tax profits on the sale of an investment management partnership — like a private equity, venture capital or hedge fund firm — at ordinary income rates of 35 percent. Proceeds from the sales of these and other United States businesses are now taxed at a 15 percent capital gains rate.

Critics say that if this so-called enterprise value tax proposal becomes law, investment management partnerships would be the only businesses in the United States where proceeds from the sale of the business would be taxed at ordinary income rates.

“The enterprise value provision that the administration has included as part of an already flawed carried-interest proposal violates basic tax fairness policy and seems to single out the private equity, venture capital and real estate industries in a punitive fashion,” said Steve Judge, interim chief executive of the Private Equity Growth Capital Council, the industry’s trade group.

Until now, much of the conversation surrounding tax increases on Wall Street has focused on “carried interest” income, or the cut of profits that fund managers earn as part of their compensation. That income is currently taxed at capital gains rates; the administration’s proposal would tax it at higher ordinary income rates.

Though an increase in the carried-interest tax rate would raise a relatively small amount of money — the White House budget office estimates $18 billion — the issue in recent years has become a flash point in the debate over how to pay for programs that will create jobs and stimulate the economy. Private equity and hedge fund firms have exploded over the last decade, and their executives have become among the most powerful and wealthiest players on Wall Street.

But since President Obama announced his jobs plan last week, the industry has not focused its ire on carried interest. Some Wall Street executives even privately concede that there are legitimate arguments for increasing their taxes on carried-interest compensation, especially as the economy continues to struggle.

Instead, they are angry over the enterprise value tax. When the provision first emerged from the House Ways and Means Committee, lobbyists and lawyers representing Wall Street thought it was a drafting error.

It was not. Proponents of the tax said it was necessary to prevent industry players from circumventing new rules on carried interest. In other words, tax policy makers feared that investment management executives would sell their businesses to avoid paying higher tax rates on future carried interest income.

Stephen A. Schwarzman, the head of the Blackstone Group, has gone to Capitol Hill to protest a possible tax change.Jim R. Bounds/Bloomberg NewsStephen A. Schwarzman, the head of the Blackstone Group, has gone to Capitol Hill to protest a tax change.

But cashing out has become more common in private equity and hedge fund land. A number of hedge funds have sold themselves to large banks, including Highbridge Capital Management to JPMorgan Chase and Old Lane Partners to Citigroup. The country’s most senior buyout executives, including Stephen A. Schwarzman of the Blackstone Group, recently descended on Capitol Hill to protest the tax.

Here is what has them so angry: It is widely understood that when a business is sold, the owners’ proceeds are taxed at a capital gains rate. For instance, if two entrepreneurs built a chain of tattoo parlors and then sold that business, their profits would be taxed at the capital gains rate.

But under the White House’s proposal, two entrepreneurs who built a private equity or a hedge fund firm and then sold it would pay ordinary income tax rates on the profits from the sale. Some policy makers say they believe the measure could raise billions of dollars in revenue for the government.

“It’s like a bill of attainder,” said one senior buyout executive who requested anonymity because he did not want to alienate the administration. A bill of attainder, which is banned by the Constitution, is a law that has a negative effect on a single person or group.

Last week, a paper written by the Democratic staff of the House Ways and Means Committee suggested increasing only the carried-interest tax rate, but not adopting the enterprise value tax.

Article source: http://feeds.nytimes.com/click.phdo?i=a18982a825be4a12eccf827e0c15a875