Soak the Rich?
Venture capital, private equity, and hedge fund partners — a group heavily laden with HBS alumni — may have dodged a tax bullet late last year, but they can expect Congressional advocates of higher taxes for investment managers to reload and try again. To recap, just before Christmas Congress passed a bill to exempt approximately 23 million middle-class taxpayers from the dreaded Alternative Minimum Tax for 2007. Facing a presidential veto threat, lawmakers lopped off the provision designed to make up for the $50 billion in lost revenue — higher taxes on investment managers. So much for pay-as-you-go legislation.
At issue was whether venture capital, private equity, and hedge fund partners should continue to pay the 15 percent capital gains tax rate on their earnings. Lawmakers had proposed treating their earnings as regular income, which would more than double their tax rate.
For his part, the world’s richest man, Warren Buffett advocates higher taxes on money managers. Buffett sees no justification for a system that allows him and other wealthy investors to enjoy tax rates much lower than their office support staffs. The New York Times called the lower tax rate “morally indefensible” and “tawdry.”
Not so, contend the big-league investment firms. Their lobbying groups (www.privateequitycouncil.org/) argue that it is fair to treat the capital gains investors earn the same as capital gains earned by other types of businesses. Moreover, the system deploys capital to entrepreneurial businesses (www.nvca.org/) and fuels prosperity. Why fix what ain’t broke?
Alas, Congress didn’t fix the AMT problem; lawmakers just patched it for one year. Expect the tax debate to resurface in the not-too-distant future. With a recession in the air and times getting tough, Buffett’s point of view seems to grow more compelling by the day. What’s your take?
