Tax break called "indefensible' by Calpers CIO

FEB 29, 2012
The tax rate paid by private-equity managers on much of their income, less than half that for ordinary wage earners, is an “indefensible” tax break, the chief investment officer of the California Public Employees' Retirement System said. Calpers is one of the largest investors in private equity, with about $50 billion as of June 30. The fund, the largest public pension in the United States, has $234 billion in assets under management. “General partners should recognize that tax treatment of their income has become indefensible,” Joe Dear, the fund's chief investment officer, said last week at a meeting of Calpers' board in Sacramento. PE managers' carried interest is taxed at the 15% rate for capital gains, rather than the 35% top rate that applies to regular income. U.S. public and private pensions provide 42% of the capital for all PE investments, according to the Private Equity Growth Capital Council. “The tax treatment is incomprehensible to ordinary taxpayers and citizens,” Mr. Dear said. “If people come to believe that private-equity general partners are reaping giant returns while paying less in taxes than wage earners do, their support for those policies that enable private equity to work will be withdrawn.” Mitt Romney's campaign for the GOP presidential nomination has put the industry in focus, including his former firm, Bain Capital LLC. President Barack Obama's budget proposal last week reiterates his plan to tax carried-interest income earned by hedge fund managers and PE partners at ordinary income rates, raising $13 billion over a decade. PE firms typically charge about 1.5% of assets to cover expenses, and 20% of the profits from investments as compensation or carried interest. Under pressure from rivals, Mr. Romney, whose wealth is estimated at between $190 million and $250 million by his campaign, last month disclosed tax returns showing that he paid a 13.9% tax rate in 2010 on income of $21.6 million. “The private-equity industry can use logical argument all day long,” Mr. Dear said. “It does not diminish the gross unfairness that people perceive, that some of the wealthiest and most prosperous people in this country pay a lower tax rate on their income than wage earners.” Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said Jan. 18 that he plans to reintroduce legislation that would tax carried interest at ordinary income rates.

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