Too Timid for Tax Increases
Published: October 11, 2007
Someday, Americans who earn millions upon millions of dollars each year will no longer pay taxes at a lower rate than the middle class and the merely affluent. Someday. But not this year, and with 2008 being an election year, probably not then either.
The Washington Post reported this week that the Senate will not advance a proposal this year to raise taxes on private equity partners, the deal makers who have become multimillionaires and billionaires mainly via debt-driven buyouts of public companies. The partners pay a flat tax rate of 15 percent on most of their earnings, compared with rates as high as 35 percent for most everyone else — say, firefighters, nurses, doctors, teachers and soldiers. A spokesman for the Senate majority leader, Harry Reid, told The Post that time appeared to have run out to act this year and that, in any event, the issue needs more study.
That decision has all the signs of a delaying tactic to avoid raising taxes on an industry that is a heavy campaign contributor. Mr. Reid controls the Senate calendar, so he could make time if he wanted. And several Congressional hearings have made it clear that there is no justification for private equity’s low tax rate. Its legality rests on outdated provisions of the tax code that should be changed. It is morally indefensible. And it is illogical from a tax perspective.
The law rewards investors for taking risks with their money by allowing them to pay taxes on their profits at a special low rate of 15 percent. But private equity partners are, by and large, managing other people’s money. As money managers earning performance fees, they don’t deserve an investor’s low tax rate.
To avoid looking craven, Congressional Democrats may move forward with a bill to raise taxes on publicly traded partnerships. They may also try to end a dubious practice whereby private equity partners convert the relatively small share of their pay that is taxed as ordinary income, at 35 percent, to investment profit taxable at 15 percent.
These sorts of baby steps would be better than nothing, but they are not nearly enough. Fairness demands that the very richest among us should not enjoy a lower tax rate than most everyone else. Necessity demands that the United States collect more tax revenue. The nation does not take in nearly enough for the spending to which it is already committed, let alone for what it needs to add, like health care, infrastructure repair, environmental protection and so on — nevermind paying the bill for President Bush’s war in Iraq.
It does not bode well that today’s leaders can’t even see their way to raising the obviously too low taxes on private equity partners.
http://www.nytimes.com/2007/10/11/opinion/11thu2.html