More on the private equity tax game

As noted yesterday, Congress is thinking about taxing a publicly held Blackstone like a corporation. The WSJ points out the tricky valuation issues involved in handicapping the legislation given the bill's bipartisan backing, the rising populist concern about wealth disparity, and a president who doesn’t want new taxes.

But the article makes clear that, if concern about Schwarzman’s wealth spurred the bill, it’s ironic what the bill does for Schwarzman: he gets five years of lower taxes, while any of his competitors wanting to go public will be subject right away to the new law. As the WSJ says:

If the bill is passed in its present form, Blackstone would receive more favorable treatment from investors than any firms that decide to go public further down the road. "This gives Blackstone a gigantic boost," said the chief of a rival buyout firm.

And this, too, is all part of the rent extraction game I discussed on Wednesday. As today's WSJ points out, "for years, firms spent relatively little on lobbying or political contributions.” Well, we can’t have that, can we? So:

last year, anticipating growing scrutiny from lawmakers, they created a new trade group aimed at heading off new regulation and taxes. Private-equity firms have also ramped up political contributions in recent months. In the first quarter of this year, private-equity firms, along with hedge funds, ranked among the top donors to presidential candidates from both parties.

* * * For his part, Mr. Schwarzman himself has started to be seen more as a mover in Washington. At the end of April, at a fancy dinner at the Mandarin Oriental Hotel in Washington, he received the Atlantic Council's Distinguished Business Leadership Award. He was introduced by former Secretary of State Colin Powell, who described him as a good friend, and shared the stage and the night's honors with former Federal Reserve Chairman Alan Greenspan and retired Gen. James Jones. He is chairman of the board of trustees of the John F. Kennedy Center for the Performing Arts.

Schwarzman's D.C. presence seems to be paying off.  The article notes that the bill followed intense “deliberations” between Blackstone and Finance Committee staff.  The lesson: play the game and we'll take care of you.

As I discussed yesterday, consistent with the "rent extraction" objective, the bill “wave[s] a warning to both passive-activity partnerships and private equity generally that could extract some nice rents “ Today the WSJ says:

While the bill introduced yesterday covers only publicly traded partnerships, it comes as Senate tax aides have spent months reviewing the tax issues raised by the private-equity and hedge-fund industries -- and have considered whether to raise taxes on a broader cross-section of the industry, including firms that remain private.

But there is a constraint on these Congressional games:  There's a big world out there. Wall Street loudly complained about SOX’s effect in driving business offshore. When SOX was passed, Congress paid almost no attention to this problem. That may not have been the case this time. As this WSJ article notes, the UK is also considering raising taxes on private equity:

One reason U.S. legislators might have avoided taking further action up to now has been fear that putting taxes up would drive the industry offshore to London. But that argument is neutralized if London acts on its own.