Bogle Says Tax Break for Private Equity Firms ‘Ridiculous’

John Bogle
John C. Bogle, founder of the Vanguard Group Inc., speaks at a portfolio manager conference in New York on Feb. 16, 2012. Photographer: Scott Eells/Bloomberg

John Bogle, the Vanguard Group Inc. founder who popularized index investing, said lower tax rates for certain types of gains earned by private equity firms are “ridiculous.”

“I’m arguing for the capital gains rate taxable as ordinary income,” Bogle said today in an interview with Bloomberg TV's Betty Liu at a conference organized by Bloomberg Link in New York.

Bogle, 82, who described himself as a lifelong Republican, has lashed out against Wall Street excesses in recent months and has backed the so-called Volcker rule seeking to curb risky bets by financial firms. Mitt Romney’s campaign for the Republican presidential nomination has drawn increased scrutiny to the private equity industry, including his former firm, Boston-based Bain Capital LLC.

Private equity managers typically earn a percentage of their profits from investments as compensation, which is known as carried interest. The compensation is taxed at the 15 percent rate for capital gains, rather than the 35 percent top rate that applies to regular income.

“Carried interest is a bit of a technical fraud,” said Bogle. “I do feel these things strongly.”

Joe Dear, the chief investment officer of the California Public Employees’ Retirement System, said during a meeting of the pension fund’s board on Feb. 13 that the tax break for private equity firms is “indefensible.”

Budget Proposal

Calpers, as the retirement system is known, is the largest public pension in the U.S. and had invested about $50 billion in private equity as of June 30.

Private equity firms usually charge about 1.5 percent of assets in what is called a management fee and take as much as 20 percent of the profits from investments in carried interest.

President Barack Obama’s fiscal 2013 budget proposal, released earlier this week, reiterated his plan to tax carried interest earned by hedge fund managers and private equity partners at ordinary income rates, raising $13.5 billion over a decade.

Bogle has spent his career advocating a low-cost approach to investing and speaking out against against conflicts of interest and speculative trading in the financial industry. Last month, he said he would grade the U.S. financial system a “D” and urged greater regulation, sharing the views of Paul Volcker, the former Federal Reserve chairman who has proposed the Volcker rule.

Bogle, a Princeton University graduate, founded Valley Forge, Pennsylvania-based Vanguard in 1974 and introduced the Vanguard 500 Index Fund, the first retail index mutual fund, two years later. His economics research at Princeton helped lay the groundwork for index mutual funds. When Bogle retired from Vanguard in 2000, the company established the Bogle Financial Markets Research Center.

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