Calpers’s Dear Calls Private Equity Tax Break ‘Indefensible’

Private equity managers’ preferential tax treatment, less than half the rate paid by ordinary wage earners, is “indefensible,” the investment chief of the California Public Employees’ Retirement System said.

Calpers, as the pension fund is known, 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 U.S., has $234 billion of assets under management.

“General partners should recognize that tax treatment of their income has become indefensible,” said Joe Dear, the fund’s chief investment officer, at a meeting of the Calpers board yesterday in Sacramento.

Private equity managers get a portion of their clients’ earnings as investment income if the underlying earnings are treated that way. So-called carried interest is taxed at the 15 percent rate for capital gains, rather than the 35 percent top rate that applies to regular income.

“The tax treatment is incomprehensible to ordinary taxpayers and citizens,” Dear said in an interview. “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paying less in taxes than wage earners do, their support for those policies that enable private equity to work will be withdrawn.”

U.S. public and private pensions provide 42 percent of the capital for all private equity investments, according to the Private Equity Growth Capital Council in Washington.

‘Gross Unfairness’

Mitt Romney’s campaign for the Republican presidential nomination has put a spotlight on the industry, including Romney’s former firm, Boston-based Bain Capital LLC. President Barack Obama’s budget proposal yesterday reiterated his proposal to tax carried-interest income earned by hedge fund managers and private equity partners at ordinary income rates, raising $13 billion over a decade.

Private equity firms typically charge about 1.5 percent of assets to cover their expenses, and 20 percent of the profits from investments as compensation, or carried interest.

Under pressure from rivals, Romney, whose wealth is estimated at between $190 million and $250 million by his campaign, last month disclosed tax returns showing he paid a 13.9 percent tax rate in 2010 on income of $21.6 million.

“The private equity industry can use logical argument all day long,” Dear said. “It does not diminish the gross unfairness that people perceive. That some of the wealthiest and most prosperous people in this county pay a lower tax rate on their income than wage earners.”

U.S. Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said on Jan. 18 that he plans to reintroduce legislation that would tax carried interest at ordinary income rates.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE