bloggingbuyouts

"Score one for the barbarians" -- so reads the New York Post today. The reference, of course, is to Barbarians at the Gate, the sordid tale of the leveraged buyout of RJR Nabisco in the 1980s. Today, the private equity barbarians have won another battle: there will be no new tax on carried interest, at least not this year.

Charles Rangel, the House Ways and Means Committee Chairman has dropped a proposed change in the tax laws that would raise taxes on hedge fund managers. The change was relatively simple, raising the tax rate on fund profits and management fees from the current 15% to the 35% that corporations (are supposed to) pay. Needless to say, the private equity industry fiercely opposed the change, which would have raised $54 billion in new taxes.

The change in the tax code was part of a bill aimed at alleviating the effects of the Alternative Minimum Tax, which now affects 23 million households. The idea was to "fix" the AMT to keep it from being applied to broadly; the resulting loss in revenue could then be made up by increasing taxes on fund managers. But it looks like the managers are too powerful to allow that to happen, at least this time around. Hey, do you think this could have anything to do with campaign contributions and the growing political power of the newly gilded elite? Nah, couldn't be...

I admire the cleverness of Iowa Republican Senator Chuck Grassley's tax proposal. Bloomberg News reports that Grassley wants to introduce a bill that will link passage of a tax increase on private equity firms to an Alternative Minimum Tax (AMT) tax cut.

Grassley's proposal would increase from 15% to as high as 37.9% the tax rate that private equity firms pay on their profits with a measure shielding 23 million mostly middle-income households from an AMT increase this year. Unless Congress acts, the AMT will impose a $45 billion tax increase on 23 million households in 2007; permanently repealing the AMT would cost the government more than $1 trillion in revenue.

While it's not clear how much additional revenue the private equity tax rate increase would raise, the politics of the linkage is clever. That's because it will be hard for politicians seeking reelection to vote against a measure that could ease the lives of 23 million potential voters. If they happen to at the same time raise the taxes of those big campaign contributors, the need to help middle class AMT voters will offer the politicians some cover.

Peter Cohan is president of Peter S. Cohan & Associates He also teaches management at Babson College and edits The Cohan Letter.