August, 23rd 2007

Private equity tax increase won't raise revenue...

– Liz Mair

... says a report cited by Bloomberg:

Congressional efforts to more than double taxes on managers of private-equity firms will generate little or no additional revenue to help pay for middle-class tax cuts that many lawmakers are seeking, a new study shows.

Buyout and venture-capital firms will restructure their affairs to sidestep any new tax laws aimed at their executives, according to the paper by Michael Knoll, a law professor at the University of Pennsylvania in Philadelphia.

At most, lawmakers may generate $3.2 billion a year in added revenue by raising levies on the share of profits, called ``carried interest,'' that executives receive as compensation for managing funds, Knoll wrote.

``Transactional structures are likely to change in response as tax rules change,'' he said in the paper, posted Aug. 16 on the Web Site of the Social Science Research Network, a repository of academic papers sponsored in part by the University of Chicago Graduate School of Business. ``Those changes are likely to reduce additional tax revenues.''


"Common good"-oriented legislation targeting smooth operators in the money-raising, and business-expansion realm rarely have the result intended. A good case in point would be Sarbanes-Oxley, which is possibly the most widely reviled piece of legislation ever, so far as a lot of companies seeking to raise capital, and lawyers and accountants, too, are concerned and whose implementation has not led to everyone bowing down and just accepting that they have to put up with the absurdly onerous requirements of the act, but has rather led to moves toward establishing so-called "hybrid marketplaces", which if used, would get around requirements to comply with the hated law. The contemplated tax hike just looks like another endeavor that will have the same kind of end result.

Not that a huge amount of time and money won't be wasted-- both by our short-sighted and blinkered legislators in Washington, and by firms trying to get around the new tax hike by hiring clever lawyers and accountants-- in the meantime.


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