IRS Should Crack Down on Private Equity’s Abusive Tax Alchemy
As Warren Buffett famously observed, “…while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.” He was referring to the fact that capital gains earned by wealthy investors are taxed at a much lower rate than wages earned by workers. And while commissions paid to shoe salesmen and bonuses paid to bankers are taxed as ordinary income, the performance pay earned by private equity firm partners for managing an investment fund — so-called carried interest — is also taxed at the lower capital gains rate. This may be outrageous, but at least it’s legal.
The same cannot be said for the tax dodge used by private equity firm partners to convert the ordinary income they receive from their fixed management fees into additional capital gains. The partners at Bain Capital famously waived over $1 billion of management fees over a 10-year period, saving these partners, at a single firm, over $250 million of taxes on what was, essentially, their salary income.
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