Private Equity and Taxes

As if I need more bad news to pile upon the delta variant and climate change, here comes an article outlining the power of private equity firms over the IRS. This article originated from the New York Times but the article may be behind a paywall, so I found a link leading to another news source displaying the same exact article. I’m not sure how that works but if it works…

The tax dodge is to turn one type of investment into another type of investment that incurs a lower tax rate. The 2% fee is an income rather than an investment so it incurs I believe a maximum of 37% income tax in 2021. The trick was to turn this 2% fee into something that sounds like an investment involving “risk” and thus would incur a lower type of tax called a “carried interest tax” that is about 20% in 2021. The reasoning behind the lower tax rate is that the gains come from a risky investment and society wants businesses to invest in risky ventures that’s the heart of capitalism.

Except that 2% fee that has been turned into some kind of investment (called fee waiver) is not really an investment with risk: the 2% fee income is guaranteed income, no matter if couched as a 2% fee or as a fee waiver. The private equity firms will get that 2% no matter what.

The fee waiver is just semantics.

Unfortunately, the IRS does not have the staff to pursue the complex structure of private equity firms, and so wealth inequality continues to widen.