Pacific Investment Management Co.’s Bill Gross said that wealthy Americans, having reaped the benefits of favorable tax treatment, should be willing to pay a greater share to bolster the prospects of the working class.
“If you’re in the privileged 1 percent, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. “Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing ’capital’ at lower rates than ‘labor’ should now end.”
Gross criticized a growing trend of large U.S. companies retaining earnings or buying back shares at the expense of labor, as expenses were cut along the way. Companies need to be reinvesting in plants and equipment rather than focusing on cost cutting and equity buybacks, he said.
Gross’s public pronouncements can rock the markets. After he rebuked General Electric Capital Corp. in March 2002, saying the finance arm of General Electric Co. was amassing too much short-term debt, the stock of GE tumbled 6 percent in two days.
Gross said today that his criticism in past years was supposed to be indicative of the growing use of leverage rather than to be company specific. Companies continue to increase earnings while revenue remains flat, he said.
“Never have American companies sent a greater share of their sales to the bottom line,” Gross wrote in the outlook today. “Even when S&P 500 companies have witnessed a decline in corporate earnings” at the same time “they have still experienced earnings per share gains.”
Gross’s personal wealth is estimated at $2 billion. The 69-year-old Pimco co-founder has endowed a foundation with $293 million in assets and raised money for Doctors Without Borders, a medical charity, by selling parts of his stamp collection.
Gross, who was urged by billionaire Carl Icahn to give at least half his wealth to charity, said yesterday that he and his wife, Sue, are committed to giving away all their money before they die. Gross, speaking in an interview on the CNBC television network yesterday, said he’s following a pledge by steel magnate and philanthropist Andrew Carnegie, who called it a disgrace for a wealthy person to die with money.
Icahn and Gross, in a public exchange of Twitter posts over the past week, have prodded each other to devote more effort to helping people. Gross, who started the discussion on Oct. 24, said Icahn should stop pushing Apple Inc. for a stock buyback and instead spend more time on philanthropy like Bill Gates, the Microsoft Corp. co-founder, and his wife, Melinda.
“Developed economies work best when inequality of incomes are at a minimum,” Gross wrote. “By reducing the 20 percent of national income that ‘golden scrooges’ now earn, by implementing more equitable tax reform that equalizes capital gains, carried interest and nominal income tax rates, we might move up the list to challenge more productive economies such as Germany and Canada.”
The share of private-equity managers’ profits in buyout deals is known as carried interest. President Barack Obama’s 2014 budget proposal released in April had proposed taxing carried interest at ordinary income rates rather than preferential rates provided to long-term capital gains.
The $250 billion Total Return Fund managed by Gross has gained 0.93 percent in the past month, outperforming 58 percent of comparable funds, according to data compiled by Bloomberg. The fund has returned 8.4 percent on an annual basis in the past five years, placing it in the 77 percentile.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 30.