Government Looking to Private Equity Firms to Increase Tax Revenues

With the ‘s recovery budget continuing to grow, the government is desperate for cash. Once again private equity firms are being threatened with higher taxes on their carried interest. The carried interest is what private equity executives take from the profits of their funds after they compensate their investors. It is typically 20%. The controversy with this is that the tax increase will hurt venture capital firms and small partnerships who are taking large risks by investing in new businesses during this time of economic uncertainty. Shouldn’t these firms be rewarded for taking the large risks associated with start-up companies? Is it not common knowledge that new businesses will create more jobs?

On one hand, private equity investors appreciate high profits for the risks they take and only pay a 15% tax rate. This is a lower tax rate then what the mom and pop businesses pay who are struggling to cover expenses. Additionally, private equity investors only receive their carried interest after a fund generates a performance hurdle of approximately 8%. The government argues that raising the tax rate from 15% to 35% will raise $24 billion over a decade.

On the other hand, private equity firms are not the bad guys in this economic crisis – in fact they are helping drive economic growth. The serious credit crunch has left businesses across the globe starving for capital. Not only is difficult to find loans, but credit lines were decreased immensely leaving people with higher debt to credit ratios. Private equity firms have been one of the only hopes for emerging businesses. In a time where the job market is horrifying, it doesn’t seem to make sense to hurt the businesses who are trying to create jobs.

What is the solution? That is for the Senate to decide as this has proposal has passed the House of Representatives 3 times only to get stopped in the Senate.
www.reuters.com/article/idUSTRE6161SX20100207

By Shosh Stone

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