Where could the U.S. government come up with the money to lift up those Americans hurt most by the rapidly changing global economy?
If just one private equity firm would pay their fair share of taxes on annual profits, the U.S. government could provide:
- Pell grants for close to 200,000 low-income college students
- $5000 each in retraining funds for more than half a million displaced manufacturing workers
There's some talk in Congress about various measures to force private equity firms to pay their fair share of taxes, but little has been said about the size of the private equity tax rip-off. The rip-off takes place on several different levels.
Let's start with personal income taxes. The top 25 private equity fund managers earned an average of $570 million each in 2006, or 19,000 times the amount earned by an average worker with $30,000 year in taxable income. But both the fund manager and the worker are taxed at the same rate.
The worker falls in the 15 percent tax bracket for ordinary income. Most of the income earned by the fund manager, however, is treated as capital gains rather than ordinary income, and taxed at the capital gains rate of 15 percent instead of the ordinary income rate of 35 percent for the higher income bracket. In the case of the top 25 fund managers, if all of their income was taxed at the capital gains rate in 2006, the country lost $2.8 billion in federal tax revenues.
The private equity tax rip-off also occurs at the level of the firm. On a dollar-for-dollar basis, the worker with $30,000 a year in taxable income paid ten times more in federal taxes in 2006 than the largest private equity firm in the country.
The Blackstone Group paid $32.2 million in federal taxes on profits of $2.3 billion for 2006, an effective tax rate of 1.4 percent1. If Blackstone had been taxed at the regular corporate tax rate of 35 percent, it would have owed $805 million, or $773 million more than it paid.
The private equity tax rip-off also occurs when the companies these firms own and manage cut their tax bill by taking on huge amounts of debt. Because they can deduct interest payments from their taxable profits, these private equity-owned companies often report no profits and pay no taxes. This tax break cuts total U.S. corporate tax revenues by an estimated 5 percent, or more than $20 billion a year.
So just how much money are we talking about here? The $20 billion rip-off from interest deductions is enough to triple the entire discretionary budget for the U.S. Department of Labor. The missing $773 million from Blackstone's tax rip-off could have provided Pell grants to more than 190,000 low-income college students. And the $2.8 billion lost from taxing the top 25 fund managers at the capital gains rate could provide $5,000 each in retraining funds for more than half a million displaced manufacturing workers.
This kind of money is worth more than just a little talk.
Greg Tarpinian is the Executive Director of Change to Win.
1Financial News, "Blackstone Borrows $80 billion," March 26, 2007.