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As part of the continuing struggle by the hyper-wealthy to avoid ever having to truly carry their share of the load, TPM Muckraker gives you the case of the poor little rich boys and girls of The Blackstone Group:
Unless Congress treads lightly on delicate private equity and buyout firms like The Blackstone Group, we could see an end to entrepreneurship as we know it, the Bush administration warned this week. But under current tax law it could take Blackstone a mere 15 years to get back all the taxes it paid — plus pocketing an extra $200 million — on the $4.75 billion it made from going public on June 22.
Nice work if you can get it. But how did they pull that off?
This is how, per the NYT — namely, the violent abuse of the concept of “goodwill”, the various intangible assets associated with a business enterprise:
Individuals who create good will cannot deduct it. But when good will is sold the new owners can because its value is assumed to erode. The Blackstone partners sold the good will from their left pocket to their right.
In simplest terms, the Blackstone partners paid a 15 percent capital gains rate on the shares they sold last month in the initial stock offering to outside investors (those shares represented a stake in the Blackstone management company, not its funds).
Blackstone then arranged to get deductions for itself for the $3.7 billion worth of good will at a 35 percent rate. This is a twist on the “buy low, sell high” stock market adage; in this case it would be “tax low, deduct high.”
Congress is being warned by Bush (and of course the DC/K Street Elites) not to touch this and other big fat tax loopholes being exploited by firms like Blackstone (which of course coughs up hundreds of thousands of dollars each year in straight lobbying money alone).
I’d love to see Congress give Bush (and the Elites) the back of its collective hand in reply, but we’ll have to do three things to ensure that happens: Spread the news far and wide, lobby our Senators and Congressmembers (and run primary opponents against those who won’t get the message), and work to get the money out of campaigning so that our Congresscritters aren’t locked into a perpetually-escalating cash race.
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zunoed?
Missed it by that much :)
Hooray for Dakine!
I’m rather inordinately proud of that graphic parody. Though comparing Blackstone to a dog is unfair — Golden Retrievers are bred to have better morals and loyalty.
I saw this the other day and was appalled but not surprised. There are far too many New Age robber barons that seem to think that the revolution and/or next depression won’t touch them at all.
Kinda like the French aristocracy circa the late 1780s or the Russian aristocracy circa WWI
And the rich and well connected in this country rarely serve in combat.
I’m confused.
“The Blackstone partners sold the good will from their left pocket to their right.”
huh?
Here’s a radical thought. There should be a cap on wealth.
Well, every one knows that being rich means you’re a better person and a better Christian. [/snark]
Someone needs to take the GOP out behind the shed and explain that taxes are where their salaries and (very generous) benefits come from, as well as those government-paid trips and the nice hotel rooms (with or without hookers). They seem to think it’s their right to have all that without paying for it.
one of jfk’s ‘errors’ was trying to tax certain industry ‘loopholes.’
that idea was nixed real real quick following events in dallas.
lbj was on it like a jackrabbit.
Warren Buffett put it best when he wondered why his secretary’s earnings are taxed at a higher rate than his own.
This system is entirely gamed to protect, maintain, and expand the wealth of an increasingly isolated elite. On Bastille Day, I hope our legislators who do their bidding pause to think of what their fate might be, should this continue.
Oklahoma kiddo @ 7
the fair play beret?
:-)
no wait. that’s not a ‘cap’ is it?
TeddySanFran @ 10
TSF,
Great minds working in similar patterns. See my #4
BTW, great comment on the WaPo0 article on Chimpenfuhrer’s claim of “Embarassament Privilege”.
It all boils down to public financing of elections.
Take a look at the world’s most profitable companies.
http://money.cnn.com/galleries…..ml?cnn=yes
Them that has ‘gets’. Them that don’t, don’t. How many of you out there can afford tax attorneys and cpa’s to get you the best deal?
When exactly did “Wealth of Nations” become this nation’s bible?
And if we throw another Boston Tea Party, we will be labeled unpatriotic and put in jail.
Loo Hoo,
I left you a comment at the end of the last thread.
Making the call on Monday. Thanks.
The Richest of the Rich.
http://www.nytimes.com/2007/07…..ed.html?hp
See what happens when I try to link?
Richest of the Rich.
Excellent, Tross. Will you keep us posted? I’m sure it’s fair to say that I’m speaking for all of us when I say that we’ll be with you in spirit!
Oklahoma kiddo @ 5
Not since the end of WWII, anyway. Through WWII the rich(see Kennedy), thought fighting in the war was a great step in the advancement of a political career. Now, they have no honor. No sense of sacrifice.
Joe Klein’s conscience @ 22
My father was a sailor on the U.S.S. San Jacinto (light aircraft carrier). The youngest U.S. Navy pilot flew off the San Jacinto. His name? George Bush.
No gravy train there: The San Jacinto was very busy in the Pacific Theatre.
Loo Hoo @21
Will do.
Oklahoma kiddo @ 5
Yeah, and that’s becoming the case even in the UK, where Prince Harry tried his damndest to get sent to Iraq with his unit in the tradition of nobles and royals leading the troops into battle, but even a younger royal son is considered to be too valuable to risk losing, even though the monarchy has no actual power any more.
How in the HELL can ANYONE call it entrepreneurship WHEN ALL of the income generated comes from the federal government? True entrepreneurship is offering a service that is wanted by the public not a government!
New Age Robber Barons indeed from tomorrow’s NYTimes.
How does one spell the sound of a scream???
I agree with OK Kiddo,there should have been a cap on wealth a LONG ass time ago.
I know that meets with resistance,but if you cannot live on a few million dollars for your whole lifetime,that’s a personal problem,not a public one.
The whole system is rancid. The middle class is pretty much gone,it’s only a matter of time before there’s a huge implosion.
Red Cloud said(paraphrasing):
Only when the last tree has been chopped down will people see that you can’t eat money.
It’s time for locally based economies to come back into vogue.
LS @ 28
AAAAEEEEIIIIIIIYYYYYYYY!!!!!!!
(sorry)
AAAAAAAAAAYYYYYAAAAAAAAAAYYY!
I think, LS.
dakine01 @ 30
Thank you, I needed that!!!!
hpschd @ 6
Gee, where’s our CPA friend? You never can find an accountant when you need one.
As best I can figure it, BX “acquired” a goodwill asset when it offered its stock to the public recently, and by means of that offering raised a sum of money that was greater than the marketable value of the assets in the corporation. This intangible difference, which is presumed to be due to the ineffable wonderfulness of being The Blackstone Group, is “goodwill” in BX’s left pocket. Taxes were paid up front at the cap gains(?) rate (or just 15 percent corporate?), yada-yada-yada.
Now what I didn’t realize until reading this post and article was that goodwill apparently can be sold as such (accountants—help!!), either outright or into some kind of spin-off entity. BX have done the latter, thereby creating a righthand pocket for themselves; the cash flows into the entity that I suspect must be necessary to make it look legit are some portion of the management fees from BX’s management group activities. The entity has “bought” the goodwill, and so now has a depreciating asset. This creates a series of tax deductions over time, whose benefits are set up to apply to the same folks who paid the original 15 percent rate tax bill.
If this seems at all clear, then I sure hope it’s not too far from correct!
Loo Hoo. @ 31
Yeah! Sounds just like Dakine!!
Then on the other hand, here is what many people are facing:
http://www.nytimes.com/2007/07…..4sat1.html
LS @ 28
like this
It also might be helpful if “wealth” wasn’t in large part often intangible. As in projections and stocks and things that have nothing to do with actual physical assets and money itself. Much of this exists in the ether as it were. It’s bullshit.
Well, Vitter will return to congress next week. I wonder if he’ll be wearing his diapies?
http://talkingpointsmemo.com/n…..work_n.php
Is there a particular reason we’re screaming, or just general fuckery to the max?
punaise @ 36
That is truly the epitome of a scream!!!
CTuttle @ 39
707 Punaise!!
Hey! Here’s something I can live without – it’s “Gold Toe Socks”. Yeah. Socks. The kind you buy at Wal-Mart and places like that.
Blackstone owns them. $466 million worth…
No more socks for me.
Oklahoma kiddo @ 17
OK – you know that the guys in the first Tea Party were risking a lot don’t you?
Ian’s up top.
Loo Hoo. @ 38
Speaking of Vitter! Don’t chop it off!
http://www.youtube.com/watch?v=8A39J32gPxU
For us dummies (well, This dummie), can someone give a couple -sentence message to convey the gist of the message to send to congresspersons and senators?
FYI, Ian is on fire upstairs
How do you spell the sound of Impeachment so we can get our civil rights back and end the war?:
http://www.youtube.com/watch?v=qezM-Ly5dYM
LS @ 41
I really wish you hadn’t informed me of that fact. Gold toe (which I’ve never purchased at wal-mart, only at places like Macys), are about the best wearing I’ve ever had.
Boston1775 @ 42
I certainly do. They were putting their lives on the line, I believe. Would that my party (Dems) had a fraction of their courage. ;0)
suzinmpls @ 45
Good question. From what the articles say, especially the part about corps being able basically to choose their own tax schedules by taking advantage of accounting strategies, it seems sensible to start by taking some of those strategies away from them. The history of the Senate Banking Committee, which has taken the lead in (obstructing) the regulation of accounting rules, is not too inspiring there, but it’s still likely to be the best place to start. Not low-hanging fruit by any means.
Opportunities galore here for public-spirited people who know accounting and business/tax law to spend part of the time explaining them to Congress and the public.
prostratedragon @ 33
For all of you who were looking for me, let me refer you to this Wikipedia article about goodwill: Goodwill
Let’s look at this excerpt from that article:
A thorough review of Internal Revenue Code Section 197 is warranted before embarking on a discussion of amortization of intangible assets, including goodwill (to the extent that it may be deductible), for tax purposes.
Oklahoma kiddo @ 7
Really.
At what arbitrarily chosen level? And why is that arbitrarily chosen level preferable to any other abritrarily chosen level that one might arbitrarily choose?
suzinmpls @ 45
This may come as a massive shock, but Congress is on the case. And the charge is being led by a Republican, Chuck Grassley, the ranking member of Senate Finance.
Grossly oversimplified (and that’s really the only way you want to hear this from me — I’ve been practicing tax law for 25 years, and if you follow me into the weeds you’re going to regret it), the issues with the taxation of hedge funds and private equity shops are two-fold. And what Blackstone has done is the farthest thing from tax rocket science; it’s actually just straight-forward application of fundamental principles of tax law to a situation that the drafters of the Code never envisioned.
First, there is the differential taxation of capital gains and ordinary income. It’s never made sense to me. I suspect it doesn’t make sense to hardly anyone who hangs around here on a regular basis. But as it currently stands, capital gains are taxed at 15 percent, while corporations pay roughly 34 percent on their operating income.
Second, one of the fundamental principles of partnership taxation is that while partnerships aren’t separate taxpaying entities, income earned by a partnership retains its character when it is allocated to the partners.
So how does this play out?
Hedge funds and private equity funds are partnerships. The partners, typically, are a combination of high-net-worth individuals, college endowments, public employee pension funds, etc. The managers organize a corporation (no way you’re going to manage money on this scale without the benefits of limited liability) which becomes a partner in the partnership. The investors get an interest in partnership profits in exchange for putting up the money. The managers get an interest in partnership profits (typically, 20 percent) in exchange for agreeing to provide management services.
So, hypothetically, let’s say that a fund managed by Blackstone pays Jane $100 for all of the assets of FDL. Blackstone has the good sense to keep Jane, Christy, TRex et al around; readership grows exponentially, and ad revenue starts pouring in. Three years later, the fund sells FDL to Josh Marshall for $1,000. That’s a $900 gain, and at the partnership level it’s a long-term capital gain. Blackstone’s share is $180, and that $180 retains its character as long-term capital gain in Blackstone’s hands.
Presto! Compensation for management services, which under any cognizible theory of the U.S. income tax law should be taxed at ordinary income rates, is turned into long-term capital gain.
There are any number of ways to fix this, but all of them have potential technical issues and unintended consequences.
But to answer your precise question, the sound-bite is really simple:
ALL COMPENSATION SHOULD BE ORDINARY INCOME!!!
burnspbesq @ 52
We institute a tax on wealth, like the one in France: maybe in the range of 1% for total capital in excess of some minimum like $2,000,000, with one or two exemptions, like a house under some realistic limit.
burnspbesq @ 52
We institute a tax on wealth, like the one in France: maybe in the range of 1% for total capital in excess of some minimum like $2,000,000, with one or two exemptions, like a house under some realistic limit.
Well, one of those would have been enough.
FYI, Saturday block party upstairs
So, Mr. Parrish, if you’re still around, is this the part that explains why the structured entity has to receive management fees (or something)? They have to have some real cash flow to set against the intangible asset (which was only sold in the first place to create a favorable tax spread)?
It’s really clear why so few white collar matters get the public attention they probably require, isn’t it?
burnspbesq @ 52
I don’t know how considered is that opinion, but I’d say the people who do support such a view are more interested in a powerful and over-reaching (IMO) government than I and most Americans prefer.
Ownership, control, regulation, governance, pressure, these are different and ‘capping’ wealth or income is definitely a degree of ‘control’.
The closest most Democrats would ever come to that view is to suggest to those who win the wealth lottery that they step aside and let another person have a shot at it.
Perhaps it’s just that I’ve never been super-wealthy and wouldn’t know what to do with a billion dollars. But, as I’ve said before, the idea that we need to learn to share more could be spread by that kind of idea. Got enough(?), then why not retire?
burnspbesq @ 53
On operating income or after expenses and earnings distributions?
It seems to me companies might be more willing to invest if their corporate taxable income rate was lower even if their capital gains rate was higher.
You risk capital up front and don’t want to if the taxes are gonna take it all away. If the rate were lower (more like 18% as Buffet mentioned), then you wouldn’t be risking as much.
Short-term vs. long-term, vs. fees, vs. income is always going to be confusing (no need for me to tell you that). After all, what is the proper rate to tax the income from the sale of an investment? If the investment is earning rent or interest, then that certainly should be taxed as a form of income. Long-term? Maybe you just simplify it and say any time you receive income from any investment of capital (including human labor), then tax it at the time it’s received and at one constant rate (as you suggested).
Why tax at different rates except to satisfy some economics theory?
I suppose one issue to be discussed is when the super wealthy invest in large amounts of stock and don’t EVER sell, thus generating no income or income tax (presuming no earnings distributions). Of what value is an increased stock price? Is that of no taxable value at all? The estate tax is closely related to this. Are we taxing death? Are we taxing the transmission of wealth from one person to another or are we recognizing that the wealth will never be taxed if it’s never sold?
What do you think, what of families which pass along stocks & bonds (and perhaps other investments) without ever selling?
Ah, the question of double taxation, eh?
Tax the income at one rate and it doesn’t matter whether you tax at the corporate receiver or tax the individual receiver. That clarifies and allows everyone, including tax lawyers, a much easier time.
A fee? A long-term capital gain? An income? They all seem to be the same thing in this example. So, why not use one tax rate?
Probably political favoritism has played a role in helping this or that industry.
The one catch is that if you do that and you don’t want to tax investment too heavily (nobody wants to stifle business), then do you raise enough revenue for government? Who wants government revenue to bounce up and down over time with the economy?
How do you raise a steady flow of revenue for the government while being fair and allowing for economic recessions and business cycles?
To me part of the answer is a consumption tax. As consumption varies with the ability and esire of the public & business to consume, the revenue flow to government would change quite a lot. But, add to that the constant rate income taxation and you get more stability in government revenue flow.
It might work best for the public as their tax bill follows their ability to consume, rather than being fixed tightly to their income level.
masaccio @ 54
No, once again, that’s communistic theft and Americans simply don’t accept that, even if it’s meant in good spirit.
For one thing, who would feel safe with a government capable of such power over an individual? Aren’t we experiencing too much of that even now?
Back to the key question: what to do about assets which value varies in the marketplace even though they’re not sold and no income arises?
So EPU!!!
This post and discussion surely illustrate the need for a much higher level of economic education in the population. FDL is doing an exemplary service in presenting and hosting these economic discussions, particularly in complex subjects where there is either no correct answer or several correct answers. There is still a long way to go until there is a common language in economics, this is another step towards that end. So much of today’s problems stem from economic policy. All the best…….