A federal tax levied on a New York City resident is a tax on a Floridian. The previous truth is rarely discussed by economists and pundits focused on Floridians who’ve escaped blue state taxes, but it’s true nonetheless.
To see why, stop and contemplate the national implications of taxes paid by private equity multi-billionaires like Blackstone co-founder Stephen Schwarzman. Members of Congress don’t just stare lovingly at money Schwarzman pays in federal taxes, rather the copious sums Schwarzman hands over to the U.S. Treasury each year empower Congress to allocate ever more goods, services and labor in politicized fashion. In other words, the more that Schwarzman pays in taxes the greater the power of Congress to centrally plan the direction of precious resources to all our detriment.
The taxation of Schwarzman comes to mind considering the ongoing debate about taxation of carried interest. The latter is the share of an investment’s profits paid to the investment manager. Applied to Blackstone and other private equity firms, they invest in businesses of all stripes with the intention of improving them. If they succeed at (among other things) turning around an ailing business or improving one that’s already thriving (no easy feat), the far from certain profits from these intrepid forms of investing come back to them.
At present, Senators Tammy Baldwin, Bernie Sanders and Elizabeth Warren are proposing to increase the tax on carried interest income from 23.8 percent to 40 percent. Here’s hoping such a tax never goes through. As this column has made plain quite a bit, including last week, carried interest it not income. How unfortunate to tax investment returns achieved in the face of great risk at such a high rate.
Where it becomes a bit more interesting is that the debate about carried interest and tax on same isn’t just taking place in Washington. In response to last week’s opinion piece, AQR Capital’s Cliff Asness responded on X that “We in the ‘liquid honestly reported volatility’ trading world have to pay income taxes on our performance fees.” In other words, why the special tax treatment for private equity performance fees? At risk of speaking for Asness, his perfectly reasonable point is that performance fees in public markets are taxed as income while private equity fees are not. Why are we unequally taxing investment risk? It’s an essential question.
What’s important about Asness’s argument is that he doesn’t disagree with the one made last week that private equity returns and “carried interest” are an effect of businesses being improved by the PE investor. Conversely, there’s no disagreement with Asness that government shouldn’t be in the business of tax favoritism.
Where there might be disagreement with Asness would have to do with raising taxes on carried interest just to equalize taxes on private and public investment. It’s a bad deal for all.
As argued up front, a tax on Stephen Schwarzman is a big tax on everyone, including Asness. Just the same, a tax on Asness is a big tax on everyone precisely because he’s so overtaxed. As stated earlier, more dollars flowing to Washington is more central control by Congress.
Which means the aim shouldn’t be to equalize taxation between public and private investors as much as it should be to improve on the enhanced tax deal that private equity managers are said to enjoy. Let’s keep our eyes on the prize, and the prize is doing all we can to limit the flow of dollars to the U.S. Treasury.
