Friday, June 15, 2007


Holman W. Jenkins, Jr. should be taken out to the woods and spanked.

I nominate Maureen Dowd for the job, because I hear she looks good in black leather, and I understand she and Holman have had these sessions before.

How, you may ask, has Junior incurred my wrath? From his bully pulpit at the soon-to-be New York Post-it Note The Wall Street Journal, Ol' HJ penned an opinion piece on Wednesday entitled "This Year's Man Behind the Tree" (you see now why I suggest the forest for his birching), which annoyed me.

Normally Mr. Jenkins resides comfortably at #6 on my Not Usually a Complete Idiot list of business commentators, which is pretty strong praise from me, given my view of pundits in general. And, in fact, I initially had little to quibble with when I perused his screed, which opened by rather presciently noting that Congress was gunning for private equity's current tax incentives and that one could have foretold this by remembering an old Beltway truism:
When vast new fountains of wealth open up in the economy, Congress must receive its ransom in campaign donations.

He then moved on to a reasonable summary of the carried interest imbroglio which I have recently addressed in these pages. But then he just had to go and ruin the ride:

But what about the economic issue? Any tax is a disincentive, so let's just say the tax code imposes less of a disincentive than it might to what private equity does: buying, overhauling and reselling companies. Is there a public-interest reason suddenly now to use a tax-policy bludgeon to reduce the attractiveness of this business?

Holman, Holman, Holman. Have you been sneaking around with Arthur Laffer again? Do we really need to have this conversation once more?

Saying any tax is a disincentive to economic activity is like saying friction is a disincentive to driving. It is prima facie ludicrous and utterly wrong-headed. Now, I completely agree that very large or punitive tax rates can indeed disincentivize economic actors from pursuing the penalized activities (or at least chase them offshore to a more welcoming tax jurisdiction, a la the Beatles and other high earners during the 60s and 70s, when the top marginal tax rate in Britain topped out near 95%). But any tax? Bullshit.

Taxes are a part of life, and a remarkably pervasive one, too, the last time I looked. I don't know many people who undertake to feed their families, pay their rent, or accumulate wealth nowadays who expect to do so with pre-tax dollars. Now, we may not like the bite the government takes out of our paycheck, or even approve of all the uses to which it puts our hard-earned cash, but I think most of us realize that paying taxes is one of the prices we pay for living in society and therefore a normal cost of doing business.

Making the opposite argument reminds me of those pitiful souls I occasionally run across in my travels around Corporate America who hate any and all taxes so much that they are willing—nay eager—to spend sixty cents on the dollar to avoid a 40 cent tax. Usually, of course, it is with shareholder money, so the executives in question do not worry about the upside-down economics of pursuing their particular obsession. And obsession it is, seemingly driven by some pathetic nostalgia for a prelapsarian Golden Age of high collars and no taxes when billionaires could accumulate fortunes free of tax and machine gun striking mine workers with impunity. Well, wake up gentlemen, and smell the soy milk latte: those days are gone for good.

Follow along with me now through the rest of Mr. Jenkins argument. He asks why Congress should want to impose a bigger disincentive (tax) on private equity now and "reduce the attractiveness of this business." But wait: I thought it was pretty clear that private equity fund managers currently pay less tax on their earnings (15% capital gains tax versus the top marginal income tax rate of 35%) than the average overpaid CEO, ludicrously wealthy investment banker, or common working stiff. So, if I understand him, Mr. Jenkins' argument is that by proposing to eliminate or reduce their current special tax break, Congress would somehow inflict a special tax "disincentive" on private equity professionals. Come again?

Only an interested special pleader or fellow traveler could argue that eliminating a special tax break to a small number of extremely wealthy and privileged investment professionals somehow amounts to the use of a "tax-policy bludgeon" against the PE business. Mr. Jenkins, you should be ashamed of yourself.

Let us not forget that the investors in private equity who pony up the lion's share of the money in this asset class—limited partners consisting of investment funds, pension funds, and the like—do not currently benefit from the carried interest tax treatment. So reversing the current tax break for private equity professionals is hardly likely to dent the appeal of private equity to its investors or, therefore, reduce the positive effects which private equity is currently having on our economy. All it will do is bleed off a little of the upward price pressure on houses in the Hamptons, co-ops on Fifth Avenue, and party catering services at the Park Avenue Armory.

And it might bleed off some of the political pressure to do something more radical that would hurt the PE industry, and consequently the rest of us.

Private equity pooh-bahs: Shame on you for not "getting the message" earlier and heading off the legislative juggernaut at the pass with a well-timed campaign contribution or two.

And Holman? You're grounded, young man.

© 2007 The Epicurean Dealmaker. All rights reserved.