Okay, I’ve read David Cay Johnston’s article about Blackstone’s funky tax avoidance plan three times now, and I’m still miles from understanding how it works. But here’s the result:
The Blackstone Group, the big buyout firm, has devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public.
Although they will initially pay $553 million in taxes, the partners will get that back, and about $200 million more, from the government over the long term.
In a comment to a post I wrote the other day on the taxation of carried interest, one Alexander W. Scanlon (“MSc Financial Economics, Oxford University; MPhil Management, Cambridge University”) wrote that
Private Equity Firms are incredibly talented in the arena of circumventing regulation and, to the extent that it is possible, using cross-border regulation differentials to in fact create value at the expense of other [domestic] taxpayers.
His point was that it’s hopeless and counterproductive to try and stop them. I don’t entirely buy that. Private equity firms buy and run companies for years on end. Their top dogs have become public figures, or at least the top dogs at Blackstone have.
Johnston doesn’t mention this in his article, but about half of that $3.7 billion payday went to Blackstone co-founder Pete Peterson. Yeah, that Pete Peterson. The founding president of the Concord Coalition, that scourge of deficit spenders everywhere, is by all appearances taking advantage of the quirks of our nation’s tax code to increase the federal deficit by a non-trivial amount.
Peterson is planning to give away “a substantial amount” of his money to “various charities,” according to Blackstone’s IPO prospectus, so to a certain extent the government’s loss here is the non-profit world’s gain. This is worth emphasizing because rich people in many other countries aren’t in the habit of giving the bulk of their money to charity. Here in the U.S., many business titans like Pete Peterson are possessed of enough of a sense of belonging and civic duty that they give back much or even most of what they were hard-working and far-seeing and ruthless and lucky enough to get.
Many of them have not been possessed of enough of a sense of belonging and civic duty, though, to refrain from taking advantage of every last loophole in the tax code to reduce what they pay to the government. But once this behavior is exposed–and David Cay Johnston has been a pretty vigorous exposer over the past decade or so–it can be pretty danged hard for a civic-minded public figure like Pete Peterson to justify.
Not surprisingly, the normally chatty Peterson has been mostly silent since Blackstone’s taxes became a topic of media attention. I tried calling him a couple of weeks ago when I was working on a column about the taxation of private equity earnings, and was immediately shunted to a Blackstone PR guy who said nobody at the firm was talking about the subject. But the man can’t stay silent on this forever, and with this latest revelation Blackstone is going to face increasingly skeptical questioning from Congress. Which won’t be all that easy for them to “circumvent.”
Update: The Epicurean Dealmaker explains the set-up more illuminatingly than Johnston, although it would still be going too far to say I understand it. According to his account, the big issue is not so much that taxes are being avoided as that outside shareholders in the newly public Blackstone will be paying to “keep… the Schwarzmans in (almost tax-free) fresh flowers and croque monsieurs.”