Tax Loopholes, Cont.

First came the fact that principals at hedge funds, private-equity shops, and the like paid just 15% in taxes on their income. Then came the fact that when a hedge fund or a private-equity shop goes public, it's structured so that it doesn't need to pay the corporate rate of income tax. And now, the NYT's incomparable David Cay Johnston has revealed that $3.7 billion of the proceeds from Blackstone's IPO will be taxed not at the income-tax rate, not at the capital-gains-tax rate, but rather at a negative rate.

Yes, Blackstone's partners will have to pay $553 billion in taxes up-front, which is 15% of the $3.7 billion they're putting into a "blocker corporation". But in return, they will then get back $1.1 billion in deductions over 15 years, which is their share of the 35% "good will" deduction allowable on that $3.7 billion.

As it happens, I was talking taxes last night, too, and specifically some of the many ways that entrepeneurs use to avoid paying them. (Roth IRAs, apparently, are limited to contributions of just $4,000 per year – but if you value your founder's equity at a low enough price, you can put as much of it as you like into such a vehicle, and then not have to pay any capital gains tax when you go public and your equity gets sold for millions.)

Meanwhile, Paul Krugman beats up on Democratic senators for not being harsher when it comes to these tax dodges (free version here):

The hesitation of the Senate Democrats is terrible for the party’s image. It conveys the impression that they’re as beholden to hedge funds, one of the few types of businesses whose campaign contributions strongly favor Democrats, as Republicans are to the oil and drug industries.

And Dean Baker takes issue with Pete Peterson personally for benefitting from the Blackstone tax dodge. I don't buy that: it's not Peterson's fault that these loopholes exist, and his enlightened views on fiscal policy do not mean that he has any obligation to pay more taxes than he legally owes. This is why I'm unimpressed by people bashing Bono for paying low taxes, as well.

It's people like Grover Norquist who I really take issue with – people who are perfectly happy lying about the current tax code in order to prevent sensible changes. Take this, for instance:

Millions of Americans with defined benefit pensions have their retirements wrapped up in private equity firms. Ditto for college endowments and philanthropic trusts. Hiking taxes on these investments will ruin the retirement, education, and charitable hopes of millions of Americans.

Norquist knows full well that (a) college endowments and philanthropic trusts pay no tax at all; and that (b) pension funds who invest in private-equity firms are limited partners whose returns will be untouched by any proposed changes in the tax code. It's not taxes on investments which Congress is proposing to change, it's taxes on the income of the general partners.

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