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Monday, September 10, 2007

Fleischer on Taxing Blackstone

Vic Fleischer (Illinois), "the intellectual godfather of private equity tax hikes," has posted Taxing Blackstone on SSRN.  Here is the abstract [click on graphs to enlarge]:

Vic_3 This Essay analyzes the “Blackstone Bill,” which would treat Blackstone and other publicly-traded private equity firms as corporations for tax purposes. Earlier this year, the Blackstone IPO fueled a heated, somewhat confusing debate about taxing private equity. This Essay seeks to clarify what the legislation will accomplish, and what it won't.

There are two ways of looking at the Blackstone Bill. The first way is as a substantive change in the tax law. Specifically, the bill may be viewed as a rifleshot approach to changing the tax treatment of carried interest. The second way is to think of the bill as a mechanical correction of the publicly-traded partnership rules. Specifically, the bill may be viewed as a technocratic response to the regulatory gamesmanship of Blackstone's deal structure, which allows it to avoid the corporate tax that other, similarly-situated financial intermediaries pay.

Vic_2_2In terms of a change in the substantive tax treatment of carried interest, the merits of the Blackstone Bill are questionable. The efficiency and distributive consequences are unclear; the revenue potential is indeterminate. The bill fails to achieve what we ultimately want: taxing the returns from managing financial assets consistently regardless of the form in which the business is conducted.

But the Blackstone Bill is nonetheless defensible as a response to aggressive regulatory gamesmanship. To put it more provocatively, the bill is justifiable because the Blackstone IPO structure is offensive to the rule of law values on which our tax system relies.

Vic notes on Conglomerate:

This paper was a tough one to write. The normative case for taxing Blackstone as a corporation is weaker than I thought when I started the paper; the weakness relates directly to the shaky case for having a corporate tax at all. And yet there is something to be said for enforcing rules, flawed as they may be. I would prefer that Congress reform the taxation of carried interest and, so long as I'm at the wishing well, I would wish for reform of Subchapter M and integration of corporate and shareholder-level taxes. But taking the corporate tax and current tax treatment of carried interest as a given (at least in the short run), I do think the Blackstone Bill is worth passing.

For press coverage, see Blackstone Says Senate Bill to Cost It $525 Million (Bloomberg), by Ryan J. Donmoyer.

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