"Blackstone Bill" legislation reintroduced

The so-called “Blackstone Bill” or “Birthday Party Bill,”

in reference to the outrage some felt about an extravagant birthday party held by Stephen Schwarzman of the Blackstone Group
is reportedly reconsidered by Congress. The bill would tax Blackstone or other PTP (Publicly-Traded Partnerships) like Fortress, Apollo and Oaktree Capital as corporations (on full income) rather than long-term capital interest (currently 15%). The only exceptions are energy traded partnerships.

Would this force the mega firms to go private again ?

Thoughts ?

Note: "The investment funds sponsored by these firms are not publicly traded and would not face a corporate-level tax."

Dealbook's Victor Fleichter Article

http://nyti.ms/1fWg6zt

2008 (Bill first introduced http://victorfleischer.com/wp-content/uploads/2010/07/Taxing-Blackstone…)

 

The whole reason we have a 15% capital gains tax is to correct for inflation. Back in 1976 when you had to fill out tax forms by hand, the last thing you wanted to do was to look up 100 inflation indices.

Today, we should replace the capital gains tax with an inflation adjustment. We tax you at ordinary income, but give you an offset equal to the inflation over the term for which you've held the asset.

 

I've never understood why an economy would want to levy a tax on investment, but what do I know?

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
NorthSider:

I've never understood why an economy would want to levy a tax on investment, but what do I know?

I've never understood why an economy would treat a certain kind of income differently than other income.

If we're going to have a flat tax and a broad tax base, it makes sense to tax everyone the same on investment income as we tax wages. Otherwise we get guys like Warren Buffett showing up to the State of the Union with his secretary to make some sort of weird political point about who pays a higher tax rate.

We should have a 0% or very small corporate tax and tax dividends and capital gains, net of inflation, as ordinary income. The current system discourages investment and savings by the middle class.

 

But capital gains income was generated by investing after-tax wealth. Warren Buffett already paid taxes on the income he invested, why should he pay again after generating returns? Forgetting about the ethics of double-taxation, building a tax on capital gains discourages investment for everyone.

The most sensible tax structure to me has always been a tax on consumption (sales tax), which is the most reasonable behavior to disincentivize. Barring that, a flax tax on income sans capital gains taxation à la Hong Kong seems most effective.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
But capital gains income was generated by investing after-tax wealth. Warren Buffett already paid taxes on the income he invested, why should he pay again after generating returns?
Sure. And investment income is just that- additional income. If a trader bought and sold gold 20 times throughout the course of the year, selling high and buying low, a trader would argue that that is income and demand that a portion of that income be paid to him as wages. Likewise, if you managed to beat inflation by holding an asset for 5-10 years, that's also income. It's the same economic transaction and it should be taxed in the same way.
Forgetting about the ethics of double-taxation, building a tax on capital gains discourages investment for everyone.
And taxing wages more than capital gains discourages employment for everyone. Since we need taxes to pay for the government, let's just do the fair thing and tax all income the same way.
The most sensible tax structure to me has always been a tax on consumption (sales tax), which is the most reasonable behavior to disincentivize.
That's an interesting idea, but a consumption tax is regressive. If we exclude taxation on food and medicine (most states don't charge sales tax on that), have a discount on clothing (many states exclude it or tax it at a lower rate), and a higher tax on luxury goods- EG 70%, that might work. The FairTax is good for poor people and good for rich people, but it sucks for the middle class without a progressive element to the structure. The people who can only afford food and clothing have a different ability to afford taxes than the people who are buying expensive watches and cars, boats and airplanes, and really big houses.

Conspicuous consumption generates negative social externalities to other rich people. It breeds class envy and results in more socialist voting habits, which ultimately hurt rich people. It therefore makes sense that we should tax rich people who engage in this behavior more.

Concomitant with a VAT, we should also impose a national property tax to cover the costs of US sovereignty. Our domestic policy should be funded by sales tax, but our military and criminal justice system should be funded by all property that cannot be easily moved across the border with Mexico or Canada. That includes office buildings, oil wells, farmland, industrial forests, railroads, and factories. If the tax on these things is too high, perhaps we don't need as large of a military to protect them. If we have a modest military capable of protecting the US and companies threaten to leave over high property taxes, they are free to develop property in less stable countries where their assets are more likely to be seized or their country of operation more likely to be invaded.

 
Best Response
IlliniProgrammer:

Sure. And investment income is just that- additional income. If a trader bought and sold gold 20 times throughout the course of the year, selling high and buying low, a trader would argue that that is income and demand that a portion of that income be paid to him as wages. Likewise, if you managed to beat inflation by holding an asset for 5-10 years, that's also income. It's the same economic transaction and it should be taxed in the same way.

The trader would demand income in the form of wages because he isn't investing his own wealth. If he were, he would have no need to "demand" anything, and he would have already paid taxes on the wealth he is investing.

Returns on investment are generated only by creating value as measured by the willingness of buyers to consume your product. Accordingly, there is no reasonable economic rationale for taxing gain. After all, the investor has a post-tax hurdle rate and he is passing that cost onto the consumer. Eliminate the tax on his gains, his hurdle rate remains the same and the savings are passed onto the consumer. Taxes are then paid by the consumer in a more economically efficient manner (as a disincentive on consumption rather than on investment).

And taxing wages more than capital gains discourages employment for everyone. Since we need taxes to pay for the government, let's just do the fair thing and tax all income the same way.

Well: 1) I submit that income ought not be taxed and 2) I just don't see the utility in layering taxes like this. All market-clearing prices are a product of calculations based on purchasing power. Purchasing power, clearly, is assessed net of taxation. When a consumer purchases a good or service, he makes an offer based on the all-in cost to him and, aggregately, sellers decide whether to fill that order based on their required hurdle rate. If you tax investment returns, pre-tax hurdle rates rise and sellers require a higher offer price for order fulfillment. If you tax income, pre-tax salaries rise to meet the requirements of laborers and that increase in labor cost is communicated to the consumer in the form of higher prices.

There is no such thing as "taxing different people" only "taxing at different points in the value chain". And, understanding that, the only relevant question is: at what point is the cost of taxation most efficiently borne? The measure of efficiency, in this case, is a mixture of compliance costs and decisional economy / transparency. For obvious reasons, as a matter of catallaxy it is less efficient to assess effective taxation at investment, when the costs / benefits are most speculative, than it is at employment; and, similarly, it is less efficient to assess the effect at employment than it is at consumption, when the costs / benefits are discrete and readily understood by buyer and seller.

I suspect also that the costs of compliance are reduced in a consumption tax, but I'm less interested in belaboring that point and it's ultimately a less fruitful discussion.

That's an interesting idea, but a consumption tax is regressive. If we exclude taxation on food and medicine (most states don't charge sales tax on that), have a discount on clothing (many states exclude it or tax it at a lower rate), and a higher tax on luxury goods- EG 70%, that might work. The FairTax is good for poor people and good for rich people, but it sucks for the middle class without a progressive element to the structure. The people who can only afford food and clothing have a different ability to afford taxes than the people who are buying expensive watches and cars, boats and airplanes, and really big houses.

I am skeptical of your system of selecting certain "luxury goods" (who gets to decide this?) to tax at astronomical rates and tinkering with catallactics to achieve the dubious social goals upon which you expound below. But I am generally amenable to the Fair Tax system of prebates for basic consumption.

That said, your statement that a "consumption tax is regressive" is a symptom of mental anchoring to our present system of primarily income-based taxation. A consumption tax is regressive as measured by rates on income, but progressive as measured by consumption! If wealthy / high income individuals aren't consuming their marginal dollar, they must be lending or investing it, which is a much more utilitarian result than consumption from the existing pile of goods and services.

Moreover, if a consumption tax is regressive, then so to is our present system! Deductively, we know that taxes are ultimately imputed in the formula to produce a market-clearing price of goods. It may satisfy political expediency to throw out some rhetoric about "taxing the rich" or "capital gains" rather than the more democratized "income" or "goods", but intuitively we know that they are one-and-the-same. However, by layering taxes in this way, we incur catallactic and compliance costs that make the market less efficient.

Conspicuous consumption generates negative social externalities to other rich people. It breeds class envy and results in more socialist voting habits, which ultimately hurt rich people. It therefore makes sense that we should tax rich people who engage in this behavior more.

As far as I can tell, this is chock full of speculation and value judgments. The logic behind telling people "what's good for them" via legislative penalties is specious. In any case, I don't think it is worth discussing in this context.

Concomitant with a VAT, we should also impose a national property tax to cover the costs of US sovereignty. Our domestic policy should be funded by sales tax, but our military and criminal justice system should be funded by all property that cannot be easily moved across the border with Mexico or Canada. That includes office buildings, oil wells, farmland, industrial forests, railroads, and factories. If the tax on these things is too high, perhaps we don't need as large of a military to protect them. If we have a modest military capable of protecting the US and companies threaten to leave over high property taxes, they are free to develop property in less stable countries where their assets are more likely to be seized or their country of operation more likely to be invaded.

Again, taxing a different factor won't change the net result. Taxing property merely increases the cost of living and producing goods on owned land, which is communicated to the consumer through labor and land costs imputed in prices.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
The trader would demand income in the form of wages because he isn't investing his own wealth. If he were, he would have no need to "demand" anything, and he would have already paid taxes on the wealth he is investing.

Returns on investment are generated only by creating value as measured by the willingness of buyers to consume your product. Accordingly, there is no reasonable economic rationale for taxing gain. After all, the investor has a post-tax hurdle rate and he is passing that cost onto the consumer. Eliminate the tax on his gains, his hurdle rate remains the same and the savings are passed onto the consumer. Taxes are then paid by the consumer in a more economically efficient manner (as a disincentive on consumption rather than on investment).

So you agree that buying low and selling high is a form of economic value creation and therefore income. Good. Glad we're on the same page. It should be taxed no differently than other forms of income.

Furthermore, having low taxes on economic rents (which is often the source of capital gains) encourages rent-seeking behavior. (CC: the City of Chicago selling its parking meters for $1 Billion and having the PE firm triple the parking rates overnight.) We should instead be encouraging economic productivity or at the very least not favoring economic rent over other forms of income. Since capital gains and income are fungible, the only feasible system is to tax them at the same rate.

Well: 1) I submit that income ought not be taxed and 2) I just don't see the utility in layering taxes like this. All market-clearing prices are a product of calculations based on purchasing power. Purchasing power, clearly, is assessed net of taxation. When a consumer purchases a good or service, he makes an offer based on the all-in cost to him and, aggregately, sellers decide whether to fill that order based on their required hurdle rate. If you tax investment returns, pre-tax hurdle rates rise and sellers require a higher offer price for order fulfillment. If you tax income, pre-tax salaries rise to meet the requirements of laborers and that increase in labor cost is communicated to the consumer in the form of higher prices.
There's no layering of taxes here. If you earn $1 million from wages, you pay 35% on that and keep $650K. If you invest that and it grows to $1.65 million, you pay 35% on the gains; another $350K. In both cases, you earned $1 million and you keep 65% in a 35% tax regime. Theoretically, if there were no taxes you would have more to invest. However the government also has bills to pay.
I am skeptical of your system of selecting certain "luxury goods" (who gets to decide this?) to tax at astronomical rates and tinkering with catallactics to achieve the dubious social goals upon which you expound below. But I am generally amenable to the Fair Tax system of prebates for basic consumption.
Politicians get to decide it. Or you could have a threshhold stating that anything that sells for more than $50K that isn't real estate is a luxury item and the VAT increases from 20% to 50% on every dollar over that threshhold.

States decide this stuff all the time. Actually, since they should really be running more of the social policy in their states, they should be allowed to make some of these calls.

As far as I can tell, this is just chock full of speculation and value judgments. The logic behind telling people "what's good for them" via legislative penalties is specious. In any case, I don't think it is worth discussing in this context.
Politics is filled with value judgments. Taxes are inherently political. If most people think conspicuous consumption is bad for society, society has the authority to come up with a definition of conspicuous consumption and tax it. If a Republican like me thinks conspicuous consumption is bad for society, imagine what Democrats think! That's why, if we ever do move to a VAT system, I suspect there will be a higher tax on expensive goods.
Again, taxing a different factor won't change the net result. Taxing property merely increases the cost of living and producing goods on owned land, which is communicated to the consumer through labor and land costs imputed in prices.
Sure, but it does a better job of tying the cost of government to the beneficiaries of government. If our domestic policy should be funded by consumption, our military policy and our criminal justice system should be funded by taxes on property that would become worthless if we became an anarchy or were invaded by communists. The purpose of spending on the military and criminal justice is to prevent that from happening, and the biggest beneficiary is property.

Consumers benefit from domestic spending, but property benefits from military and criminal justice spending. Incidentally, neither property nor consumption can shift as easily to other countries as income or production.

 

Let me begin by saying that it is difficult to fashion a reasonable response to the post below, given that you have largely failed to engage the crux of this debate. I have laid out the point of dispute in my original post:

NorthSider:
There is no such thing as "taxing different people", only "taxing at different points in the value chain". And, understanding that, the only relevant question is: at what point is the cost of taxation most efficiently borne?

With that in mind, I will address a few of your concerns.

IlliniProgrammer:

Well: 1) I submit that income ought not be taxed and 2) I just don't see the utility in layering taxes like this. All market-clearing prices are a product of calculations based on purchasing power. Purchasing power, clearly, is assessed net of taxation. When a consumer purchases a good or service, he makes an offer based on the all-in cost to him and, aggregately, sellers decide whether to fill that order based on their required hurdle rate. If you tax investment returns, pre-tax hurdle rates rise and sellers require a higher offer price for order fulfillment. If you tax income, pre-tax salaries rise to meet the requirements of laborers and that increase in labor cost is communicated to the consumer in the form of higher prices.

There's no layering of taxes here. If you earn $1 million from wages, you pay 35% on that and keep $650K. If you invest that and it grows to $1.65 million, you pay 35% on the gains; another $350K. In both cases, you earned $1 million and you keep 65% in a 35% tax regime. Theoretically, if there were no taxes you would have more to invest. However the government also has bills to pay.

As I alluded to above, you have only here addressed the secondary point of whether the hypothetical trader 'should' pay taxes on his capital gains. Generally, I submit that the earner of $650k in post-tax wages - who thereafter accrued $1 million in capital gains - has paid a 'hidden tax' of $538k in the form of lost capital income on top of the $350k he paid initially. Had the government invested the $350k in taxes it collected as successfully as the trader did, they would have accrued $538k in capital gains without taxing the trader an incremental cent! Why it 'should' be the trader's responsibility to recompense the government for foregone capital investment is unclear to me.

Please ignore that whole line of debate, however. In the previous paragraph I emphasise 'should' because your argument appeals to the illusion that one can decide "which people" bear taxation. As I have described at length above (in fact, in the excerpt your quoted!), it is a myth that the investor individually bears the burden of this taxation.

You, of course, would not disagree the investor evaluates returns on a post-tax basis. Therefore, in your proposed 35% capital gains taxation scheme, he will require a commensurately higher pre-tax ROIC (as to provide him the same post-tax return). In order to achieve that ROIC, he will be forced to pass through the costs of increased taxation through to either the a factor of production (in the form of reduced labor compensation) or the customer (in the form of increased price). Failing both, he will simply reduce his investment or select a different investment altogether.

In both cases, the cost of taxation is borne by the market as a whole. "We", the consumers, pay that tax in the form of reduced production, labor income or increased prices. "Taxing the investor's capital gains" is merely a politically expedient way of phrasing "increased taxes" in that it placates the wage earner with the false belief that he has not incurred additional taxation.

IlliniProgrammer:

Furthermore, having low taxes on economic rents (which is often the source of capital gains) encourages rent-seeking behavior. (CC: the City of Chicago selling its parking meters for $1 Billion and having the PE firm triple the parking rates overnight.) We should instead be encouraging economic productivity or at the very least not favoring economic rent over other forms of income. Since capital gains and income are fungible, the only feasible system is to tax them at the same rate.

In a truly free market, there is no such thing as economically disadvantageous "rent-seeking" behavior. To the extent the city merely sold the physical land on which the parking spots sit to a private equity buyer, which would be free to charge a economically efficient rate, a debacle we would not have.

IlliniProgrammer:

Politicians get to decide it. Or you could have a threshhold stating that anything that sells for more than $50K that isn't real estate is a luxury item and the VAT increases from 20% to 50% on every dollar over that threshhold.

States decide this stuff all the time. Actually, since they should really be running more of the social policy in their states, they should be allowed to make some of these calls.

I am unendingly skeptical of any policy which espouses "politicians get to decide". And I am uninspired by the observation that states "decide this stuff all the time", which speaks nothing to whether such "decisions" constitute prudent policy. Nevertheless, this debate is tangential.

IlliniProgrammer:

Politics is filled with value judgments. Taxes are inherently political. If most people think conspicuous consumption is bad for society, society has the authority to come up with a definition of conspicuous consumption and tax it. If a Republican like me thinks conspicuous consumption is bad for society, imagine what Democrats think! That's why, if we ever do move to a VAT system, I suspect there will be a higher tax on expensive goods.

As a matter of principle, I disagree with substantially all of this. Most alarmingly, the idea that "society" (herein defined as "most people") has the "authority" to "come up with a definition" of [insert pestiferous behavior] and "tax it". May "society" use such "authority" to "tax", say, Judaism? Purchasing rusty Hondas? Offering lodging to African Americans? Supposing not, who shall "decide" the extent to which "society's" "authority" is circumscribed?

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
IBNazi:

Let's say Blackstone did privatize. What would be the major pros/cons?

Assuming this bill did pass, it would require the fee income of public PE firms, which is currently taxed primarily at the 20% personal capital gains rate, to undergo taxation both at the corporate level (at 35%) and again at the personal level (at the 20% dividend rate). Simply put, it would introduce another layer of 35% taxation to the current situation.

As a result, I would expect most/all PE firms to go private in order to avoid the increased tax burden.

You really should change your username.

 
mdk6c:
IBNazi:

Let's say Blackstone did privatize. What would be the major pros/cons?

Assuming this bill did pass, it would require the fee income of public PE firms, which is currently taxed primarily at the 20% personal capital gains rate, to undergo taxation both at the corporate level (at 35%) and again at the personal level (at the 20% dividend rate). Simply put, it would introduce another layer of 35% taxation to the current situation.

As a result, I would expect most/all PE firms to go private in order to avoid the increased tax burden.

You really should change your username.

I don't see the point of this bill then. Why would any public PE firms even exist then? There must be some sort of incentive that trumps being private, or else this bill is just acking for no public PE firms...did I miss something?

Also the name is a reference to the

Once I did bad and that I heard ever. Twice I did good and that I heard never.
 

Count yourselves lucky, I live in a Euro Country that taxes under 10k 26%, and above 10k 46%

‘The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." W.B." we venture the motto, Margin of Safety.” Ben Graham
 

Quod est consequatur pariatur veritatis. Voluptatem quam officia eveniet rerum et repudiandae harum. Ad voluptas qui laboriosam aut et maxime occaecati dolore.

Suscipit impedit nemo molestiae voluptas. Qui qui quibusdam quia aut dolorem unde.

‘The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." W.B." we venture the motto, Margin of Safety.” Ben Graham

Career Advancement Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Warburg Pincus 99.0%
  • Blackstone Group 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

March 2024 Private Equity

  • Principal (9) $653
  • Director/MD (21) $586
  • Vice President (92) $362
  • 3rd+ Year Associate (89) $280
  • 2nd Year Associate (204) $268
  • 1st Year Associate (386) $229
  • 3rd+ Year Analyst (28) $157
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (313) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”