Tories and the super rich
George Osborne, the Tory Shadow Chancellor, has made common cause with the left of the Labour party and trade unionists by saying he is sceptical that the huge earnings of partners in top private equity firms is a proper capital gain, as most of us would understand it.
That has big implications. If it were translated into a reform of the tax system, these private-equity superstars would be liable for the top rate of income tax on all their earnings.
They would no longer benefit from the low 10 per cent capital-gains-tax rate introduced by Gordon Brown to encourage risk-taking entrepreneurialism.
Osborne's concern is that the partners in private equity firms put only a tiny amount of their own equity (their own money) into these deals. Most of the equity in these deals comes from outside investors (pension funds, or wealthy individuals), not from them.
But for a tiny equity investment, they reap 20 per cent of the gains from these deals (known as the carry) but are liable to the tiny 10 per cent capital gains tax rate (if they pay any tax in the UK at all, which many don't).
For Osborne, this carry looks very much like a City bonus, rather than a capital gain for risk taking. Which is why he thinks they should probably pay income tax on these gains.
If all this were taxed at the 40 per cent top-rate of income tax as George Obsorne suggests, they would have to pay millions of pounds in additional tax - except that many of them would immediately take steps to become tax exiles.
Which is why it may make more sense to do what the private-equity veteran, John Moulton, said this morning, which is to overhaul and simplify the entire capital-gains-tax system, rather than penalising the partners of the big private equity firms as a special case.
However what's striking is that the Tory shadow chancellor has been much more explicit that the private-equity superstars are not paying enough tax than the soon-to-be prime minister, Gordon Brown.
Which only goes to show that in these confusing days when the old left-right political divisions are blurred, concern that the super-rich should pay their way exercises many Tories quite as much as Labour supporters.
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It's amazing what can happen in 10 years!
Labour are now the economic establishment and unwilling to risk upsetting The City whilst the Tories seem up for taking every risk in the book to get back into power.
As you said, it could be a sign of the blurring of Left and Right. I could also just be the standard metamorphosis of parties to reflect their position either in or out of power.
With the potential for a future hung parliament, we may even get to see the evolution of that rarest of beasts, the Liberal Democrat in a position of power.
Well... If it isn't an increase in their capital, how could it be a capital gain? Sounds very very much like a commission to me. If it walks like a duck...
Why don't they just charge a financial services consultancy fee with the investors as clients and take the cash as a capital gain in their own company?
Anyway... A good wheeze while it lasted.
It seems to me that there needs to be only 2 changes to the current tax system that will make nearly everybody happy..
Reinstate Capital Gains Tax to a flat 40% (maybe the 10% rule could apply up to £1m)
Get rid of Inheritance Tax.
I`m pretty sure that the net result in income to the treasury will be "not a lot".And an awful lot of people will be very happy...except maybe financial advisers and lawyers who spend their lives working out new ways to reduce IHT/CGT and of course private equity partners !
Charging 40% capital gains on private equity (ie singling out the industry) might be counter-productive as such companies could probably take steps to change their status to escape some fiscal dues. Private equity is a huge engine of corporate activity at the moment, surely seeking to restrain its dominant players will harm UK plc?
This is very educational. Can you or any one of your kind please direct to a website where i can get the dafault probabilities of at least 50 companies listed under the iTraxx indices. i could not find one as of this time and am totally at a loss.