Bush echoes Open Market on private equity partnership taxes

I don’t know if George Bush, or anyone in his administration for that matter, is an avid reader of Open Market. They sure haven’t been reading our entries on ethanol subsidies.

But today at his surprise press conference that largely dealt with the economy, the president showed that he “gets it” on one issue very important to freedom and prosperity. Today, in response to a reporter’s question, he rejected an increase in taxes on private equity general partners. Proposals in Congress would more than double taxes on these partners by treating their gains from “carried interest” of partnerships’ capital gains as “ordinary income” subject to maximum of 35 percent tax rates. Using reasoning similar to mine in Open Market last week, Bush said there was no way to single out private equity without hammering many types of business partnerships.

Here is what Bush said (transcript of press conference available here):

First of all, I think that what ends up happening is, in trying to deal with one particular aspect of partnerships, is that you

up affecting all partnerships. And partnerships are an important vehicle to encourage investment and capital flows.

They’ve been important vehicles to encourage the, you know, entrepreneurial spirit. In other words, small businesses have been organized as limited partnerships.

We’re very, very hesitant about trying to target one aspect of limited partnerships for fear of the spillover it’ll have in affecting small business growth. And we don’t support that.

As Open Market pointed out last week in a post that was widely picked up, by the tax bill sponsor Sander Levin’s (D-Mich.) own admission, the higher taxes spun as hitting private equity barrons would also as much as double the taxes of ordinary shareholders of real estate investment trusts.

And for taxation purposes, how do you define “private equity?” All businesses not publicly traded would qualify as “private,” and all have portfolios that consist of some type of “equity.” Levin’s bill specifically lists “real estate” as a commodity that would make firms eligible for this tax. What private firm doesn’t own or lease real estate? So a “carried interest” tax would add another massive layer of complexity as well as the possible burden of higher taxes, for even the tiniest partnership. That’s something that, with this volatile market, we just don’t need.

For more on private equity’s efficiency, and how scaling down Sarbanes-Oxley would give oridinary shareholders more of its benefits, read my op-ed in yesterday’s Investor’s Business Daily.