Closing Private-Equity Tax Loopholes

What to make of the Baucus-Grassley bill designed to force Blackstone, and any other partnerships looking to go public, to pay the corporate rate of income tax? It looks very much like the closing of a loophole to me: there's really no reason why public "unitholders" of Blackstone should get to keep significantly more of its pre-tax income than shareholders of similar companies with a different corporate structure.

Blackstone's founders, of course, have benefitted themselves from a different loophole, and one which the new bill will not address: the fact that their income is taxed at the 15% capital-gains rate, since they've managed to persuade the IRS that it's not really income at all, but something entirely different, called "carry".

Trying to close the "carry" loophole would be much harder, since it affects many more people – private-equity and venture-capital professionals across the country, rather than just those looking to take their partnerships public. What's more, it'll be hard for politicians to attack those people now, just as they're asking for massive campaign contributions in the run-up to the 2008 elections.

And then, of course, there's the third loophole, which is linked to the fact that hedge-fund managers and private-equity professionals can keep a large chunk of their income in offshore vehicles, where it can reside tax-free for years before it is repatriated and taxed. That loophole, too, is unlikely to be closed this side of the elections.

But especially if a Democrat ends up in the White House, it seems likely that all of these loopholes are going to be closed sooner rather than later. A lot of men have become dynastically wealthy partly by exploiting them, but all things must come to an end. And there's really no reason why hedge fund managers and private-equity billionaires deserve the kind of tax treatment that they're basking in at the moment.