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...

While most people realize that there's really no good reason that massive private equity firms should be taxed differently than corporations like Goldman Sachs Group (NYSE: GS), the big money bigwigs have support where it really counts: Washington, DC.

Some Senate Democrats like Charles Schumer of New York have been strangely silent on the issue, although Congressman Charles Rangel and others have been staunch supporters of a bill to increase taxes on private equity funds. According to The Wall Street Journal [subscription], private equity firms may have bought themselves an ear in Washington: "Most of the leading candidates for president in 2008 have attracted strong support from private-equity firms. Republican contender Rudy Giuliani's top contributor so far has been hedge fund Elliott Associates LP, where executives and employees have provided about $195,000 of his campaign funds so far. Democratic candidate John Edwards has raised about $182,000 from individuals associated with Fortress Investment Group LLC [NYSE: FIG], a hedge fund where he worked, according to the Center for Responsive Politics."

Republican candidate Mitt Romney amassed much of his fortune and reputation as the founder of Bain Capital, and Sen. Hillary Clinton also has received large donations from firms including Farallon Capital Management LLC and Avenue Capital Group.

There seems to be little question that newly public private equity firms should be taxed like other corporations. As Alan Murray writes in yesterday's Journal, "that's a hornet's nest that legislators won't want to touch. In the end, Mr. Schwarzman's best defense isn't that his current tax treatment makes sense, because it doesn't. It's that any effort to fix the problem will arouse a poisonous swarm of special interests."

It would be nice if Congress would stand up to the special interests and tax private equity funds fairly -- not because it would generate that much additional revenue, but because it makes sense.