Private equity's wedge
It is the thin end of a very fat wedge.
As I wrote here last week, the 180 or so partners of the mega private equity firms pay nil or derisory tax on the millions of pounds many of them earn each year on their 鈥渃arry鈥, or their share of the capital gains made on the businesses bought by their respective funds.
Given that the majority of these people are non-domiciled or non-resident for tax purposes, a tiny minority pay even the paltry 5% tax that is levied under Gordon Brown鈥檚 benign capital-gains-tax rules (the rate is 10%, but what's paid is just 5% thanks to well-established conventions on the calculation of costs).
So if such a small number of people are deriving such a fabulous tax break, why are our elected representatives getting quite so worked up about it?
Well, it鈥檚 because their underlying concern is about something much bigger: it is about the consequences of the entrepreneurial economy which most politicians have for years been saying they wanted to see take root in the UK.
In the past few years there has been a golden age of British wealth creation, especially in the City of London. But now that we have it, not everyone is comfortable about it.
An unavoidable consequence of the success of the City and financial services has been a massive enhancement in the ability of talented individuals to generate fortunes for themselves on a scale unseen for perhaps a hundred years.
In private equity, hedge funds and investment banks, there is a culture of big-money rewards which is part-and-parcel of their dynamism and success.
But it鈥檚 not just the City. Seriously wealthy people are being born every day as they sell businesses they鈥檝e created.
It all means that the gap between the very richest and the very poorest is widening at a remarkable rate.
And there are implications for social cohesion, especially if the wealthiest are seen to be making the smallest contribution in tax to the state that nurtured them.
What Sir Ronald Cohen 鈥 a doyen of the private-equity industry 鈥 said to me on Today (which you can listen to by clicking here) about the risk of a violent backlash is worth hearing, for all the sniping from his competitors about how he has already pocketed his own very fat wedge and is therefore blithely unconcerned about spoiling it for the next generation.
To digress for a second, even if Cohen is non-domiciled for tax purposes 鈥 which I am told he is, although he does also pay substantial tax here 鈥 it seems to me to be just silly to argue (as his rivals do) that he has no credibility when arguing that a more progressive tax regime should apply to private equity.
But to return to the big issue, the British economy has grown considerably faster than it would have otherwise have done, thanks to the flourishing of a new spirit of enterprise.
But the biggest rewards have accrued to a minority - and growth has been disproportionately weighted towards the prosperous south.
So it's time to recognise that the debate about private equity's fat rewards and low tax is really about something much bigger.
It is about waking up to find that we now live in a winner-takes-all society in which the gap between the super-rich and the rest is widening at the speed of a private Gulfstream jet - and whether we are really at ease in that brave new world.
I'm 
颁辞尘尘别苍迟蝉听听 Post your comment
Robert,
What do you think about Evan Davis's most recent blog on private equity? He seems to be saying that it's a scam to invest a bunch of money fairly safely and cream off the rewards for yourself. Entrepreneurial, certainly, but surely not useful to those at the bottom?
For once I agree with you.
The plain fact that we need to accept that some people really are much more productive and creative than other people. Taxation is a means to ensure that the costs of essential public services are paid for but this does not necessarily mean that different people should pay different amounts for what is essentially the same service. A person who earns 拢1 million a year does not cost the NHS more for the same operation as someone who earns 拢10,000.
The present tax system penalises more productive people by asking them to pay disproportionately more for the same public services compared with other people. The only reason that this is at all possible is that until recently it has not been possible for the more productive to do anything about it. With competition between states for these creative people they now have a choice. If we insist on trying to fleece these people we will have to face the consequences because they can leave.
If they do there is no doubt that the London and the South East will decline with falling house prices, lower job creation etc and that will benefit some other state.
So it's bad to make millions by buying businesses and stripping the fat to make them more efficient - which actually safeguards the jobs from global competition.
But it is OK to make millions kicking a plastic ball around a field, writing one good tune/novel/play in your entire life, or prance around in the semi-nude with various bits hanging out.
What a peculiar society we have where enterprise is valued so little and pantomime so much.
NeilW
I haven't changed my view that Private Equity has little or no real impact on true economic growth because it essentially creates nothing new.
Apparently it doesn't actually improve the competitiveness of UK plc either because according to the latest league tables we're at number twenty but sliding backwards.
Would I kill it off by taxing PE out of existence? No - but I'd use tax as a threat to make PE companies put up more risk equity for start-ups and spin-outs.
Is it me or is the logic of the argument against private equity somewhat flawed/perverse?
The benefits of private equity to the long term health of the economy are well recognised, albeit that the Unions, in particular, don't like the painful short term effects that is generally felt in restructuring the target companies.
To argue the system is wrong because cleaners pay more tax (as a relative portion of income, that is)than the private equity men/women surely means that cleaners, and others in low paid jobs, are therefore overtaxed and not that private equity is under taxed.
This is especially as the long term net benefit to the treasury in tax revenue (directly and indirectly) from the activities of private equity is highly, and positively, significant.
Reducing the tax (significantly) that the low paid pay is surely the rational answer to the problem?
Well, I sold my business to a bunch of spivs who were very good at manipulating share prices and ended up with a 200% tax bill that year. So it's not all plain sailing for the entrepreneur! I may feel mild envy for a 5% marginal rate, but I know couldn't do what's needed to get it - that work isn't my cup of tea, and I'd be no good at it.
History suggests that you can't get rid of the wealth gap without throwing out the baby with the bathwater. And it's not as if the wealthy simply make a bonfire out of the money they earn. It's reinvested - some of it right on TV on Dragon's Den.
Perhaps the question should not be why do some people pay 5%, but why do so many pay 40%? Why _not_ try a flat tax?
We are also waking up in a country where the pension deficit has been dramatically reduced by fund managers' investment in private equity houses. The huge profits recorded by the PE industry do not exclusively benefit the CEOs.
Yesterday's treasury select committee meeting was an outrage. Questions such as 'Are you proud you pay less tax than cleaners', demonstrates a total misunderstanding of the issue by the committee. It is an economic, not a moral decision and, as you have written in the past, the implications are huge. I have no faith in this government to do the right thing.
Very much agree - this has all been about the trades unions - the GMB especially - trying find a problem with private equity when their real concern is to keep their members in 'zombie jobs' in underperforming companies. 'Protecting' members is what makes nuion members keep paying thier dues - but is not helping the economy.
They have found their issue in envy. Your point about the over-taxation of cleaners is well made.
A calm debate about the taxation of capital gains might be appropriate. A political tax-grabbing rule-change that hurts the wider business community should be resisted - and Gordon Brown should be held to account for it - as he has not yet been for creating a
Am I missing something? Why does everyone seem to say that CGT is taxed at 10% when the HMRC website says 40%? See
Could you explain where the 10% figure comes from?
Some points spring to mind:
1. Governments in general, and Labour governments in particular, are spectacularly bad at wealth and job creation.
2. In Ireland, when the taxation rates were reduced, total tax revenues actually increased.
3. Wealth creation is optimally achieved by the most efficient and effective use of resources, which means that jobs change, markets change, competitors change etc.
3. This latest little drama is driven by desperately needy soap opera politicians.
I am astonished that private equity is being put on trial for the ingenuity that its partners have shown. Instead of rounding them up in front of a panel of MPs like a group of convicts, they should be applauded and paraded in High schools so youngsters can be inspired.(I doubt the story of Dick whittington is allowed in today's schools judging by the attitude of the MPs on yersterday's panel )This might help reverse the current trend where most young girls and boys want to be glamour models and premiership footballers respectively.
As a foreigner working in the city I am boggled by this attitude that wealth creation and ambition seems to be frowned upon more and more in Britain .Already we have seen one or two cabinet ministers asking for a cap on city bonuses.Believe me ,we earn our bonuses , most days start at 7.30 am and finish between 8 and 9pm.
All it does is discourage British youngsters from entering the city and leaving your finest industry (Finance ) to be dominated by foreigners (myself included ).But again everyone has got a choice, wash dishes and get the minimum wage (plus tax credits subsidised by those in the city)or enrol for a business/finance or accountancy, course get into the city, work long ours but earn fantastic amounts.
As it stands most firms i know cannot fill all the vacancies with locals and are recruiting from Eastern Europe, India , Australia , USA and South Africa.Inevitably we will soon hear the same voices moaning about the number of foreigners in the city like the football pundits alread do.
The bootom line is that Britain is a capitalist society and we can't have it both ways.
I couldn't give a damn how much these champagne quaffing plonkers earn, but the problem is that their disproportionate wealth distorts the market for the rest of us, driving up house prices and feeding inflation. The extra pensions costs and unemployment payments for the thousands of workers sacked as part of their "restructuring" (i.e. fire everyone and misrepresent profits and earnings figures)also represents a cost to the nation. Now to find out these clowns are getting a free ride at the taxpayers expense is unacceptable, the private equity industry needs to pick up the tab for the problems and costs it creates for the nation. If charging more tax to the partners does that, then so be it. Given that simliar moves to close this loophole are underway in the US, its time for the PE industry to stump up what it owes.
Robert
You still have not given the detail of the statistics that you say show that UK pensioners are under-invested in private equity.
from the FT this morning:
"Business coverage on the 成人快手 often falls short of the organisation鈥檚 standards and some of its interviews are 鈥渟ycophantic鈥, according to an independent report. The review, commissioned by the 成人快手 Trust from a panel chaired by Sir Alan Budd, recommended that the corporation address the lack of knowledge of business issues among staff; widen "the range of editorial ideas and programming about business"; and "ensure compliance in business coverage with standards of impartiality".
I find myself agreeing with this entirely
Private equity is nothing special. Most of the extra returns are simply the result of the extra financial gearing being employed.
My main problem with it is that in a growing econcomy these bets are pretty safe ones. You put in your 拢1m, gear up the business and maybe exit for 拢5m or 拢10m. If it all goes pear-shaped, the downside is limited to your initial 拢1m.
I see no particular reason why capital gains should be taxed any more favourably than income. As a long term investor and gainer I would not object to paying tax on my gains. Nor does Warren Buffett.
I run the BUSM pensions Action group in Leicester and greatly admire those like the company founder whose entrepreneurial skills benefited thousands aound the world. The Apax owned company demerged in 1997 and one part crashed in 2000 taking around 拢10m of debts to employees with it. Local MPs of both parties have repeatedly asked for an enquiry.
Would the great man like to come to Leicester to see the results of his efforts? Ruined lives and misery and workers with over 40 years in a pension scheme on pensions credit?
It is a superb irony that Cohen is in charge of unclaimed assets -which may provide compensation to colleagues. Are we expected to say thankyou?
Surely, the real problem is that so many company directors sell out too cheaply with the first whiff of cordite. In effect, boards have not dome their job properly since they have a duty of care to all shareholders to maximise use of assets in a company. All too often, selling to a private equity company/hedge fund is often an admission of failure by company boards and institutional shareholders who have allowed such inefficiencies to exist, with UK boards being so incestuous and staffed by so many incompetents!
Politicians, notorious for their spurious expense claims, calling business people immoral is a joke. If they have operated within the law then maybe the law needs changing.
In all this discussion about private equity, I see that there was a well lobbied 'memorandum of agreement' between the Revenue and the venture capitalists. You can access this special 'agreement' at
The rest of us outside of clearly don't have the right PR.