Could private equity firms join reinsurance companies and mutual funds in going abroad due to increased taxes and regulations?
Without a question, this could happen if Congress and the Obama Administration move forward to change the tax treatment for private equity and hedge fund income from the present 15% for capital gains to that of 35%, the top rate for income.
This “carried interest” rule has come before Congress and never moved, and for good reason. Driving high income wage earners overseas is never sound fiscal policy: ask any number of European nations (there is a reason Bono operates his financial affairs from the Netherlands and not Ireland, with his venture firm operation based in California)!
There are plenty examples of this already for America. The United States is now denied tax revenue from much of the reinsurance industry, which operates from Bermuda for no other reason than it is a more hospitable tax environment (all regulations are a tax). The same is true for the Templeton Funds group being based in the Bahamas even though the founder, Sir John Templeton, is originally from Tennessee. Joining them also in the Bahamas, among others, is Joe Lewis, a billionaire investor originally from London.
Private equity groups operate on a global basis. There is no geographical reason why many must be based in the United States. If taxes are increased on the income of the executives by billions of dollars annually, these firms could follow reinsurance companies to Bermuda, or billionaires like Templeton and Lewis to the Bahamas…or even Bono to Holland!
That is in no way in the best interest of the United States. One of the most significant competitive advantages that America has over every country is a vibrant financial sector that evolves to meet the demands of the investing public. Emanating from this have been financial innovations that have improved products ranging from mortgages to mutual funds. These have allowed for tremendous advances in the quality of life of those utilizing these instruments in a responsible manner.
It is no different for private equity groups.
Private equity has contributed a great deal to companies operating more efficiently. Many, many firms have been brought to market or revitalized that would not have been without private equity ownership. That is manifested by the spread of private equity firms around the world.
This growth could be expedited by those leaving the United States if taxes are increased. Certainly some private equity executives earn large compensation packages. But there is nothing illegal or unfair about it. Private equity is a sector where the top earners can do very well, just as in retail, entertainment, science, medicine and virtually every other segment of the United States economy.
Keeping the private equity industry in the United States is in the best interest of the country. Inhibiting financial innovation has never served a useful purpose and it is always defeated by the free flow of capital around the world. Higher taxes on those who have succeeded in private equity in the United States will have them “following the money” to where treatment is the best.