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Both the hedge fund and private equity industry had free rides during George Bush's Administration when the Congress was safely in Republican hands. All that changed in November 06 when the Democrats swept the Congress, and with the change in control came new Democratic responsibilities to address the fiscal deficits generated during the time, the Republicans controlled both the executive and legislative branches of government.
It is strange to ponder, but the Republican Party which is considered by most to be the party of fiscal responsibility has probably generated 80% to 90% of the nation's accumulated national debt. Nevertheless, myths still persist that the Democrats are the big spenders. Just today, the major newspapers featured articles stating that Bush says Democrats must control spending.
Now there are only two ways to deal with spending. The first is to spend less, but no politician likes that concept. The first rule of government is that politicians regardless of party SPEND MONEY. The second way is to raise taxes in an attempt to close the gap between spending and revenues taken in. With the Democrats in power, they will use the second method, which now brings us to Hedge Funds and Private Equity.
Under the provisions of the current tax code, both Hedge Funds and Private Equity are given preferential tax treatment. Certain items of income which might be considered subject to ordinary income tax rates are instead subject to 15% capital gains tax rates. As for the equity of this policy, the quick and dirty of it, is that there is no equity or fairness. The tax code is 80,000 pages of special interests. Every provision in the tax code was written in a certain way to benefit some one, or some special interest, whether it's the farmer or a hedge fund, or the restaurant industry. Everybody exercised their political muscle at one time or another to get what they could out of the tax code.
These special interests just head down to Washington DC and meet with the people who control the Congress, go to fancy restaurants, and try to re-work the tax code to benefit themselves. The latest journeyman to Washington is none other than Henry Kravis, the man who made the private equity industry what it is today, through the formation of Kohlberg, Kravis, Roberts and Company (KKR). Democratic Congressman Sander M. Levin is proposing to more than double the amount of taxes Kravis now pays. Kravis is a billionaire several times over, and he's still looking to cut his tax bill. Whatever happened to giving back. Whatever happened to Andrew Carnegie's approach to civic responsibility?
The Congressman's staff asked Henry Kravis very pointedly, if increasing taxes on private equity would adversely affect workers and other middle income type families by distinctly lowering returns that pension funds got on their investments. When Kravis answered “No”, the meeting ended abruptly.
In other meetings, Stephen Schwartzman who founded the Blackstone Group, and David Rubenstein, who co-founded the Carlyle Group have met with other regulators in an attempt to stall the tide. Lobbying groups are being set up in a hurry, and money is being poured into them by private equity and hedge funds, who up until recently were asleep at the switch. They did not realize to what extent Washington has had them in their gun sights. For more on this topic, please visit our website.