Private-equity billionaires—the new Masters of the Universe—often pay far lower rates than the rest of us. But Washington is trying to change that. Get ready for a fight.
July 23, 2007 issue - In Wall Street's pecking order the partners in private-equity firms are the true aristocrats. With their English tailored suits, country estates and oriental rugs, they have a taste for the trappings of gentry (even their secretaries, it seems, have English accents). Global in reach, able to marshal billions to buy big companies, they float above the grasping traders and get-rich-quick hedge-fund operators. Private-equity partners are not just in it for the money (though the successful ones make tons of it), but for the power to reshape whole industries. Unlike corporate CEOs, who are shackled by the short-term focus of shareholders, private-equity managers can swoop in and transform a troubled industry to create efficiency and growth. Private-equity managers see themselves as the new industrial statesmen, throwbacks to the age of J. P. Morgan a century ago, when an unregulated Wall Street was in many ways more powerful than Washington.There is a catch to all this public-spirited, high-policy grandeur, however. The very rich in America pay taxes at a lower rate than most working people, and, due to a wrinkle in the tax code, private-equity partners enjoy some of the lowest tax rates of all. At a Hillary Clinton fund-raiser in New York last month, Warren Buffett, no stranger to wealth, told an audience filled with bankers and real-estate developers the system was, in effect, rigged. "This is what Congress in its wisdom did: the 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter." Buffett (who is a director of NEWSWEEK's parent, The Washington Post Company) offered a million dollars to any fellow magnate who could prove he had higher tax rates than his secretary.
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