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Private equity's wedge

• Robert Peston
• 20 Jun 07, 02:02 PM

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.

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