Mid Market Private Equity

The “death tax” crowd always brings out some iconic John Wayne rancher/farmer whose children/grand children may lose the family farm/ranch because of the death/estate tax.

While Warren Buffet, Sen Rockefeller and others elsewhere mocked the logic of the argument, it occurred to me that these ranchers/farmers are a better example of the problem with capital gain tax than with the estate tax.  Even with an estate tax, one does have to die, pay the tax and most don’t feel sorry for people “winning the ovarian lottery” and having to sell Bing Cosby’s ranch.

But with a capital gains tax, taxed at ordinary income rates, say 40% combined, the iconic rancher and his children/grandchildren are more or less stuck working as ranchers unless they want to suffer a 40% loss (it sounded like the ranch was acquired for nominal peanuts years ago).    Keeping people in one business/occupation seems as efficient as the caste system. Not to mention a 40% tax with few sales may raise less tax revenue than a 20% tax with many sales.

 I noticed,”Tax Reform, Anyone” type argument

http://www.washingtonpost.com/wp-dyn/content/article/2007/10/27/AR2007102700117.html

Unfortunately for private equity, in my opinion, the Republicans are right but for the wrong reason (all taxes, even uneven taxes, are bad.)  The right reason being that one taxes different things differently if different.

On things one has to do - die, work, - one can tax heavily without large distortions.  On things one does not have to do - sell capital investments - one can’t tax heavily without distortions. 

There was an article on The Motley Fool  on “The Death of the Blackstone Put” aka “private equity put” which may be useful in explaining why people, beyond the few in private equity, should care about private equity:

http://www.fool.com/investing/dividends-income/2007/11/15/buyers-behaving-badly.aspx

Also, it looks like Warren Buffet berating the rich for not paying taxes was pushed off the front pages by some inspector general not knowing his brother worked for Backwater security firm.