Private Equity's Odd Man Out

The argument that private equity and hedge fund managers should pay more in taxes - by considering fees on future profits as regular income rather than as capital gains - has found an unusual supporter in Robert Rubin, the former Treasury secretary and Goldman Sachs chairman and the current chairman of the executive committee at Citigroup.

Responding to a question at a conference on Tuesday, Rubin said that the managers' share of future profits should probably be taxed at the top personal income rate of 35 percent - more than double the current way they are taxed, at the 15 percent rate for capital gains. These managers, he said, were performing a service, and fees for service work is usually considered ordinary income.

His comments, at a conference in Washington held by the Hamilton Project, a Democratic-minded think tank, follow comments by the chairman of the Senate Finance Committee, Max Baucus, and the committee's ranking Republican, Charles Grassley, that they are looking at making such a change in the tax laws.

Populist calls for changes are not perhaps not surprising in the wake of the publicity that has been given to hedge fund managers who made nearly a $1 billion or more last year, and the huge gains that await Stephen Schwarzman when his private equity firm Blackstone Group goes public.

What is surprising is that the usually cautious Rubin was publicly drawn out on this issue. What makes it even more remarkable is that both his former firm and current employer are huge beneficiaries of the lucrative fees that private equity firms and hedge funds pay out to Wall Street banks . (Rubin said he was speaking for himself and not Citigroup.)

Dan Primack notes on his blog peHub that when Robert Reich made similar comments last month, he was derided by some of his readers as "being an out-of-touch socialist who's never worked in the real (read: capitalist) world.'' -- not a retort one can use with Rubin.

Still, all the talk in Washington will probably come to naught, writes Holman W. Jenkins Jr. in the Wall Street Journal. Congress, he says, often recognizes that "it's a bad idea to introduce sweeping changes to an industry after hundreds of billions have already been invested."

"Congress is especially reluctant,'' he adds, "when that industry has been a driving force behind higher stock prices, bringing happiness to huge classes of voters."

by Jeffrey Cane

Photograph by Chris Kleponis/Bloomberg News/Landov