TCS Daily

Private Equity: Time Is of the Essence

By John L. Chapman - September 14, 2007 12:00 AM

In an economy with $47 trillion in financial assets, how important is the $2 trillion private equity (PE) sector to economic growth in the United States? Does the tax structure for the sector matter, with respect to its potential impact on growth? Indeed, specifically, how harmful would an increase in taxes on private equity profits be in terms of growth? This essay offers perspective on this taxation issue, borne of the insights of classical economics as well as modern public finance theory; and, presented below is a template for thinking about how proposed tax changes on private equity will affect the broader economy.

First, some background: any tax legislation must be mindful of the macroeconomic environment, and September 2007 finds global financial markets in flux. In the United States, the Dow Jones Industrial Average topped 14,000 on July 17, only to fall back some 10% due to investor fears led by sub-prime mortgage market defaults. A wide range of financial institutions holding mortgage paper suffered losses, from U.S.-based hedge funds and mortgage lenders to European banks, and a few have collapsed. Countrywide Financial, the largest mortgage lender in the U.S., has announced 12,000 job cuts from a total employee base of 60,000, and approximately 50,000 other jobs in financial services have been lost since August 1. The August jobs survey of U.S. non-farm payrolls showed a net decline of 4,000 in August - the first in four years - and benchmark commodity prices are rising in step with a declining dollar.

With markets now presuming action by the Federal Reserve to lower interest rates, the Dow has recovered to a trading range above 13,300, albeit with increased volatility. In the midst of this uncertainty, the United States Congress has returned from August recess to take up several pressing fiscal issues, among which are a series of tax increase (or decrease) proposals: everything from foreign corporate withholding, to the Alternative Minimum Tax (AMT), to expiration of college-tuition and various sales-tax deductions, to increases in "sin", oil & gas lease, and gasoline taxes are under consideration. Any change in tax law has the potential to impact economic growth, and foremost among the proposals to be considered this Fall are increases in taxes on the profits of various investment firms structured as standard or master limited partnerships (e.g., private equity [buyout and venture capital] firms, hedge funds, or real estate MLPs). Generally taxed at "preferential" rates akin to capital gains (15%), the Chairmen of the Senate Finance and House Ways & Means Committees are entertaining legislative proposals to increase these PE profit tax rates to corporate or ordinary income levels (topping at 35%).

Indeed, Senator Max Baucus (D-Montana), who chairs the Finance Committee, has already introduced S. 1624 along with ranking Republican Charles Grassley (R-Iowa); this bill would hike the tax rate for any publicly-traded private equity firm (e.g., Blackstone Advisors) to 35%, or the effective corporate tax rate. Meanwhile H.R. 2834, introduced by Sander Levin (D-Michigan), is even more onerously inclusive; it would increase the rate to 35% for all firms in the private equity and venture capital sectors utilizing the limited partnership structure.

The battle lines for the coming policy debate have already been drawn: in brief, proponents such as Senator Baucus or Congressman Rahm Emmanuel (D-Illinois) claim that private equity partnerships operate like traditional money managers performing a service for fees (which are taxed as ordinary income, up to 35%), and thus have been the beneficiary of a loophole which now needs to be closed. Some academic scholars such as tax law professor Dan Shaviro of New York University concur with this sentiment, while others, such as economist Alan Auerbach of the University of California at Berkeley, admit that returns to institutional investors funds will be lowered, but only marginally. More broadly, there does not seem to be wide populist opposition to a tax increase which would seemingly fall upon allegedly wealthy Americans.

On the other hand, private equity professionals point to the sure outcome of higher taxes on PE profits as consisting of lowered returns for limited partner investors (e.g., pension funds, endowments, wealthy individuals), and less capital and liquidity in the sector. Defenders of private equity assert that these effects would be due to higher fees and a more adverse risk-return profile, the necessary concomitant of which will be lower job creation, lower mobility of capital, and lower economic growth. Finally, tax hike critics say, the unfairness of this issue would be borne by the industry's professionals; leveraged buyout and venture capital investments are the quintessence of patient risk capital in pursuit of capital gains. If dollars from the same bucket flow to limited partners as capital gains, so should they to the general partners who drove the speculative investment.

Given the above, how should we think about proposed tax changes? To answer this question we will first summarize private equity organizational and transaction structures, and then proceed to think systematically about taxation in this sector (comments in this essay will refer mainly to buyout and venture capital funds, but the discussion of taxation effects apply equally well to hedge funds or other limited partnerships).

Private equity defined, its importance as an economic institution, & its taxation

"Private equity" is a term which actually connotes two distinct types of investment: early-stage venture capital (say, of biotechnology or software start-ups), and later stage investment in mature-industry companies, whether a minority stake or a complete buyout of the firm. Private equity firms are formed as limited partnerships, in which entrepreneurial promoters (acting as general partners, or GPs) raise capital from institutional investors (e.g., pension funds, endowments, insurance companies) who are the limited partners (or LPs), and deploy this capital into multiple companies over a 10-14 year life of the partnership. In both VC and buyouts, managers in these companies have significant equity stakes and other incentives to create value, prior to an exit or liquidity event (e.g., an initial public offering, or sale to an industry acquirer).

Today there are over 2,000 private equity firms of all types in the U.S., managing over $2 trillion in leveraged capital. While small as compared to public equity markets, venture capital and buyout firms have an outsized influence on American business and finance: in recent years over one-third of all mergers or acquisitions have involved PE firms, and some of America's most storied companies are venture-backed (e.g., Google, Genentech). The buyout sector has driven changes in corporate governance, capital allocation, and business strategy which have carried over into publicly-held companies, while the venture capital sector has rationalized the processes of new business formation. Both aspects of private equity, then, are efficient institutional responses to the needs of a modern capital-using economy with an ever-growing division of labor and ever-extending division of knowledge. And, both offer increasing liquidity for U.S. and global capital markets, which engenders more efficient (and wealth-creating) deployment of capital. Finally, both enhance another key institution, entrepreneurship, which is the driving force of a market economy and the wellspring of wealth in civilized society.

Private equity partnerships are set up in fairly uniform fashion with respect to legal liability and profit sharing (and this arrangement is common to hedge funds, real estate, et al.): the GPs are legally in control of fund disposition and investment strategy, and make all entry and exit decisions; GPs also sit on boards of investee companies and provide monitoring and strategic oversight as well. They typically charge a management fee (1-2.5% of total assets committed) and transaction or consulting fees for their oversight (the latter paid by each investee company),and receive a carried interest in the eventual profits of the partnership (usually at or near 20% of total profits). The carried interest, or carry, is paid out, however, only after a preferred return is paid to the LP investors (typically in the 8-9% range), who then receive the bulk of residual profits (viz., roughly 80%).

It is this carried interest which is the focus (target?) of politicians seeking tax law changes; currently, because the carry constitutes part of the speculative profit from the partnership's investments, it is taxed as a long term capital gain (15%, or the same rate as the LP interest). The legislative proposals mentioned above seek to increase the tax rate on the carry to 35% (other cash compensation to the GPs such as the management fee are taxed as ordinary income, up to 35%); proponents such as Professor Shaviro argue this is appropriate due to its fee-for-service nature, and hence should be taxed as ordinary income. Professor Auerbach in turn testified that while the tax increase might result in higher fees assessed to LPs, that this would be negligible in cases where LPs had only a small portion of assets deployed in private equity investments; politicians in favor of the tax increase also have indicated effects would be negligible.

Insights from the economics of taxation inform the debate about private equity

Optimal tax policy has been a subject of debate since Adam Smith and David Ricardo promulgated the building blocks of modern economics -- which factors of production or which entities to tax, and how to tax them, has been the subject of debate for over 200 years. The following insights are of use in thinking through the taxation of PE profits:

· Because of the focus from Smith to Karl Marx on the distribution of income and returns to various factors of production (all in connection with explaining an erroneous labor theory of value), classical economists recognized four basic types of income corresponding to the canonical factors of production: wages accruing to labor; interest accruing to capital (whether in the form of stocks or bonds); rents accruing to land (and its owners); and, profit accruing to entrepreneurship (i.e., the promoters and organizers of income-generating ventures such as private equity deals). While the focus of writers such as Marx was on the relative justice inherent in the distribution of this income across these factors, for our purposes it is important to recognize the progression of thinking from this paradigm to the present issue: specifically, the Austrian Eugen von Bohm-Bawerk, in his three volume Capital and Interest (1884-1889), was the first to detail the importance of time in developing a capital-intensive structure of production (viz., specialization occurs as markets for capital goods develop in a production chain to produce ultimate consumer goods). Because of the time lag involved in production, capital investment was inherently risky (and as Bohm-Bawerk argued against his immediate target, Marx, therefore was deserving of commensurate return); later, other Austrians such as Joseph Schumpeter, Ludwig von Mises and 1974 Nobel Prize winner F.A. Hayek extended this idea by highlighting the role of the entrepreneur, in initiating risky ventures in the face of (a) pervasive uncertainty, and (b) limited, dispersed knowledge of resource supply and demand conditions (the Austrian writers also understood that the distinction between capitalist and entrepreneur was artificial; in the real world, the two were often concatenated into one risk-taking entity, as per GPs in private equity).

· These writers thus forcefully articulated the crucial importance of risk capital and entrepreneurship to a growing economy, and extended the understanding of classical writers as to the importance of capital investment in engendering productivity growth, which alone is the source of increasing wealth in an economy. To say this differently, not all cash flows from different sources are created equal. Capital is one factor of production, but it is the controlling factor; entrepreneurial skills are embodied in time-dependent capital investment as well, and thus cash flows derived from these factors have traditionally been treated more favorably in tax codes in many market economies around the world. It is important to note that modern-day advocates of tax increases on private equity profits fail to appreciate the importance of capital formation and entrepreneurship, and instead assume that, statically, production and wealth creation will somehow just "happen". But in fact, risk, trial-and-error, loss, and highly variable returns are the nature of the capitalist process; this process, which Israel Kirzner refers to as one of discovery, is the source of the progress of civilization, and empirically has been shown to be both responsive to tax policy, and better effectuated in a low-tax regime with stable property rights.

· For the most part then, over time, U.S. tax policy came to recognize the importance of capital formation to long run economic growth, and to treat forms of capital more benignly than labor. The focus here has been on income flowing to two ultimate uses: consumption, or saving. While policy has varied widely over time, most economists agree that tax-treatments which favor saving over consumption will induce capital formation and hence long run growth. UCLA economist Arnold Harberger informed the debate with important research describing the excess burden of taxation, more commonly known as its dead weight loss - this was a measure of the lost economic activity, both production and consumption, due to the tax wedge. In an important paper in 1962, Professor Harberger described a simple but realistic model in which corporate income taxes - ultimately a tax on capital -- lowered the firm's capital/labor ratio, and hence long run growth in productivity (this engendered a long empirical literature in taxation effects up to the present day -- see an interesting recent example of this in Kevin Hassett and Aparna Mathur [2006], on how wages in manufacturing respond to corporate taxes: Harberger and others ultimately argued for a tax regime which should be as neutral (non-distortive to relative prices) as possible; in the private equity context, this is an important insight because the ideal is for PE investors to make forward-looking investments irrespective of their own particular tax circumstances, and instead focused solely on the merits of the proposed transaction.

· Specifically, then, U.S. tax policy has been geared toward taxing of cash flows bracketed into two groups: capital gains, which are cash flows received based on increased value of capital assets; and, ordinary income, which is, essentially, everything else: e.g., wages, tips, commissions, interest on debt. Capital gains have, as is true currently, usually received more favorable tax treatment as a spur to capital investment, though economic activity has been responsive to changes in marginal tax rates on ordinary income as well.

Implications for policy on taxation of private equity

Given the above we are now prepared to think crisply about the taxation of private equity GPs and their carried interest:

(1) What is carried interest? From the foregoing it is clear that, in a definitional sense, the carried interest represents a capital gain: it can only arise if the value of the firm, in which the private equity has been placed, increases. LPs are taxed at 15% on this passive, long-term holding (receiving roughly 80% of any distributed profits including a preferred return), and historically GPs are taxed equivalently.

Senator Baucus and Congressman Levin contend, however, that this carried interest was earned with no underlying capital investment; it is purely cash received from services performed, because the LPs supply most of the ingoing capital. For them, carried interest is no different than, say, a 100% self-employed commissioned sales professional such as a realtor, who has earnings taxed at ordinary income rates. To put this in the language of the classical economists, is carried interest more akin to wages accruing purely to labor power (to use Marx's term), or is it akin to cash flows accruing because of an increase in capital asset value?

(2) A continuum between pure ordinary income and pure capital gains -- It seems clear that there are shades of gray with respect to income flows: University of Chicago tax law expert David Weisbach (2007: argues that a Bill Gates-type entrepreneur has, like the GPs in private equity, effectively no capital investment in a business like Microsoft, which is bootstrapped from a garage; should all of Gates' cash flows from Microsoft, therefore, be taxed at ordinary income rates? Similarly, Weisbach describes a capitalist-entrepreneur (say, a private equity GP) who borrows money to capitalize an investment fund; the GP, after returning the loan, keeps any profits from the fund and is taxed at capital gains rates, in deference to the fact that such a profit residual is indeed a capital gain. Weisbach offers yet another analogous example: a junior partner who receives entry into a law firm partnership receives an immediate economic gain which is not taxed, and at year end receives a portion of partnership cash flows without a prior capital contribution; these earnings are taxed as a capital gain. His larger point is that traditionally, U.S. tax law has looked favorably upon income emanating from entrepreneurial activity as a capital gain, and/or in cases where labor is combined with capital to produce the gain; Weisbach points out that it is impossible to distinguish flows specifically due to labor and those to capital, and hence policy errs on the side of liberality and simplicity.

To put this in the context of the value added by the GP of a private equity firm, how much value is provided by the GP in terms of deal selection; monitoring of management; strategic advice and oversight; delivery of human, financial, or marketing resources; and other services, versus what all this would cost the LP to "rent" on the managerial labor market? Seen in this light, with all the time-dependent risk involved, it seems absurd to think about carried interest as ordinary income akin to a biweekly salary at General Motors.

(3) What will be the effect of this tax increase if it happens? It is impossible to say with precision just how this tax increase would affect the PE sector in terms of magnitude, but this much we can predict in terms of direction: just as the $2 trillion sector has had positive "leverage" on public markets and business practices out of all proportion to its size in global capital markets, so will it have a negative effect beyond all proportion if enacted. For one thing, some of the tax increase will be passed on to the LPs in terms of higher fees, lowering returns, perhaps moreso than Professor Auerbach suggests. Lower capital will thus come into the sector from this, as well as exits by GPs, who will at the margin leave the business rather than face more onerous taxation. This will lower liquidity (and capital efficiency) in the sector. Starkly, the lower amount of capital in the business will deflate corporate valuations, including those involved in public company M&A - this will have a negative wealth effect on shareholders. Less directly but as importantly, the competitive whip provided by private equity to incumbent managements to deliver results or be removed will be marginally lessened, decreasing corporate productivity growth; viz., the governance effects of PE will be lessened. Lastly, for the venture capital sector, less capital will mean less innovation borne of risk-taking.


Private equity is an institutional response to the need for efficient capital formation to support entrepreneurship in a modern capital-using economy with an advanced degree of specialization and division of labor. Buyout and venture capital firms play roles of investment selection, monitoring, performance measurement, and strategic oversight which cannot be offered by traditional intermediaries such as banks. PE firms also channel and deploy capital in ways which optimize the efficient bearing of risk, in investments which are often long-lived and stretched into an uncertain future.

It is true that there appears to be a "continuum" of cash flow types to individuals, ranging from pure ordinary income at one end, to a pure capital gain at the other. However the U.S. tax code has traditionally looked favorably upon all forward-looking capital investments, and has treated GPs akin to LPs, and GPs similarly to other cases or structures of capital gains borne of an ingoing zero capital account or basis (e.g., a Bill Gates-bootstrap entrepreneur).

Given that the proposed Senate bill deals only with PE firms who become public, this issue may have been raised at this time because of the IPO of Blackstone Group, and the personal enrichment of Blackstone founder Stephen Schwarzman therefrom. If so, Mr. Schwarzmann has created what economist Mike Jensen has called a "negative externality" for the entire industry. Good economics does not always make for good politics, but at a time of macroeconomic uncertainty or even turmoil, raising taxes on the progenitors of so much entrepreneurial energy in our economy, and on an institution with outsized importance to economic growth over the last 25 years, makes little sense. Finally, to the degree there are cash flows to individuals which are borne of entrepreneurial risk, but where the asset at risk is time, as opposed to capital (money), perhaps the best policy response (per Bohm-Bawerk) is to reclassify such earnings as capital gains, as opposed to ordinary income. The self-employed 100%-commissioned professional is surely more at risk than his salaried counterpart in corporate America, after all, but it is from such efforts that great enterprises have been born.

The author is NRI Fellow in Economics, American Enterprise Institute.



The article is a classic example of an infomercial, brought to us by the representative of a special interest. In other words this special interest stands to benefit to the precise degree the general public loses.

Listen to this: "foremost among the proposals to be considered this Fall are increases in taxes on the profits of various investment firms structured as standard or master limited partnerships (e.g., private equity [buyout and venture capital] firms, hedge funds, or real estate MLPs). Generally taxed at "preferential" rates akin to capital gains (15%), the Chairmen of the Senate Finance and House Ways &Means Committees are entertaining legislative proposals to increase these PE profit tax rates to corporate or ordinary income levels (topping at 35%)."

Naturally, in the opinion of the author, this is bad. But look at the undue break the private equity industry has been getting all along.

The point to having a preferential tax break for capital gains is to provide an "incentive for investment". Now let's forget for the moment that no incentive is needed. Any time someone is earning more money than he can manage to spend on himself, he's going to invest the remainder. But no matter. In our higgledy jiggledy world there is an apparent need to provide him with a further incentive, lest he just cast all his extra money upon the waters, or play the dogs with it at Hialeah. So he gets a preferential tax rate over Joe Dokes, who merely builds our nation for wages.

But should the profits of private equity firms be qualified as capital gains? Are they actual profits from the investments those managers have made? Or are they just common commission earnings, like the sales earnings real estate brokers enjoy?

From all I've seen of this industry, these are just ordinary income, earned from managing OPM. Why, then, should they be getting any break?

In any event, I smell a heap of bubble. The next million I make will decidedly NOT be given over to the speculative ends of leveraging already overinvested spirals of buyout mania. I think I'll just buy exotic and expensive varieties of tulip, to make my killing.

"cast all his extra money upon the waters"
Investors don't need an incentive to make an investment, the alternative being casting his money on waters, as you maintain. Investors look all around the world and if other things being equal, you usually put in into a place where there are less taxes. This is why recently, countries with lower taxes, like Ireland, former east block, Hong Kong, Singapore, are so dynamic.

You also say this author is just another example of a special interest group. Wouldn't that mean just like you and me too. The author and I, and all those countries lowering taxes, think it's better to have lower taxes, have some good reasons, and have evidence that it works. You are a consistent member of the special interest group that like command-economies, central-planning, only a "little bit of capitalism" you said somewhere before. Your group doesn't like economic freedom, and wants the state to conficate other people's money, and give it to your own pet projects. What state pet projects do you like to support again with our money?,was it the post office, or the $2billion or so for NPR/PBS, or maybe social securtity to millionaires. You said above too that the "general public" loses. So they lose if the rapacious government can't take our money, and give to....which are your favorite entitlements again? What do you call your particular brand of statism? Does it have a name, or do you just in general want snivelling beaurocrats to run our lives?

Lower taxes?
I think you may be missing the point. Giving some special interest group a tax break does not necessarily "lower taxes". What it does is allow these people to pay a lesser share of the total tax bill than others. That means the rest of us-- mostly ordinary wage earners-- have to pay more to make up their lost share. To me, that's unfair.

One of the things that enables us to accept a burden of taxes is the principle that they will be levied fairly. And as such, we can accept that workers working pay at the same rates as managers managing funds.

The other thing that enables us to accept the burden of taxation is the idea that the public infrastructure has to be maintained-- the body of laws, the roads and bridges and all the other things in the grid we rely on without having to be billed monthly for their maintenance. Instead we get billed annually-- for our fair share of these legitimate and necessary expenses.

That is, except for fund managers. They make more money, so they get to purchase special breaks for themselves.

So it sounds like your complaint is; life is not fair. I also lament the unfairness that I don't look like Brad Pitt, but we can't do anything about that. But we can stop robbing Peter to pay Paul, for those entitlements that you happen to favour. You use the old boring justifications for stat-ism. As if there would be no electric supplied, airports run, or bridges built without the government. As if, say before, when there were no taxes, did the people rise up and demand that the government take all that money, and give it out to all those pork barrel entitlements? I don't think so; it was imposed from above so crooked politicos could gain power and wealth at our expenses. But at least you would think that you command economy guys could come up new rationalisations for stealing. So what point am I missing? You want to armed thugs to take my money, and I don't want to give it to you or Tony Soprano because you're both the same.

Life isn't fair? Fix it!
I don't just complain about the unfairnesses of life, I do something about them. And if someone is getting an undeserved break that I have to pay for, I contact my congressman to get him to do something about it.

The thing that drives tax compliance is its perceived fairness. Get rid of that and people will cheat. And if the tax code breaks down, the government can't function.

You may very well be of the opinion that we'd be better off without one. Okay, go to Albania, see how well that works.

Or, imagine the world you say you'd find more convenient, where every road and bridge is built by a private company. How much do you think a short drive to the store would cost? Remember, you're not just paying for roads but for millions of toll booths or smart card sensors-- plus the inevitable advertising. Just paying all the salaries such a system would require would make driving as expensive as managed health care is today.

Are your rented cops likely to provide a greater degree of order than our municipal police forces, state cops and sherrif's departments? What kind of justice will people get who can't pay top dollar for it?

No, back in the days when we didn't have a modern tax code, we had no public services. We were in medieval times... and we still had taxes. But they came in the form of a tax man, with three or four armed brutes who just took all your money. You got nothing in return for it but the "protection" that they wouldn't be back for a while.

Re pork barrel entitlements, you're talking about two different things. The pork that gets stuffed into appropriations bills is universally unpopular-- people say. Yet they only re-elect politicians who send plenty of pork back to their own home districts. It's a flaw in the system, but one nobody wants to change.

And re entitlements, we can't live at American levels of affluence without them. Social Security doesn't cost you that much when you're working. And when you can't work any more the checks keep us out of poverty. It's not for nothing that this is considered the "third rail" of politics. Look what happened to George Bush when he tried to mess with it.

I think you're going to be much happier over in Thailand, or Singapore. No need to come back to the backward US, where we donate regularly to the framework that supports our high standard of living.

Mr. Fixit
So you try to get your congressman to do something re something he should have not power over in the first place, like raising or lowering taxes.
Then re perceived fairness, and breakdown. It's already perceived of as unfair, thus people cheat already, and the higher the taxes, the more cheating. And Albania, I've never posited that place as either a free country, or a libertarian one, or even capitalistic. Since they don't respect property rights, or have free markets, or rule of law, they're not capitalistic.
Then all your comments about having privatization in those various fields is also bogus. For example, since people can't depend on the government cops, that's why there are so many private security services around. And your allegations re the roads and all that is crap too, because all those things already exist in some places, and indeed more countries are privatizing that stuff more; like even airports in the european nanny states.
Re pork, some people do want that changed. Like guys who resent their money being stolen to pay for it.
Then re entitlements. You comment is only an allegation, the one statists always use to justify force; we have to force you give us your money because we're all better off. All dictators say that. If we can see examples of places where they don't have all those entitlements, it would show that your justification for the welfare state is also BOGUS. For example, you mentioned Singapore, that's one. Then in europe, Switzerland has far less entitlements. And other countries like the former east bloc are cutting them back and they find they're getting better off without them. RE living over there, I told you guys ages ago that I'm not american, and don't even live there, but do live in asia; preceisely for some of those reasons. So there we have it, I don't want to force anybody to do anything, but you want to use government coercion to force people to contribute to your pet entitlements which cannot be proven to be necessary.

Taxation is a Necessary Evil
"The focus here has been on income flowing to two ultimate uses: consumption, or saving."

It is basic that money that is earned is either saved or spent. Earning money and saving money is not immediately beneficial. It is only when that money is spent on a product or personal service that the money provides benefit to the spender and only the spender decides what to buy. It is at this point, and only at this point, that the money should be taxed.

This long article just points out one complicated area of our very complicated tax code. The current tax system in the United States taxes money when it is earned (income), saved (interest income), and spent (sales taxes). This tax systeem is excessively complicated and treats every individual unequally. This complexity requires the services of lawyers and accountants for the normal citizen to understand and survive.

The solution is to simplify the entire taxation system so that every citizen can understand taxes and is treated equally by the taxation system, not just tweak around the edges to benefit one group or the other. It is time to replace the current system with a Personal Consumption Tax for revenue to the State and Federal governments.



Where is your utopia?
Mr D: Your denunciation of America, and everything it stands for, is eloquent. And you seem particularly cynical over the mechanisms built into our system that allow improvement. So please tell us-- what country do you approve of most?

Would it be Hong Kong, that duty-free port of the PRC? Singapore, where every detail of their subjects' lives is micromanaged by an all=pervasive government? What?

Where is your utopia?

I never said I expected a utopia, and pointing out specific problems is not a denunciation of the whole place. In fact, I'm consisntently pro-american around here, when I compare it to the majority of countries. But it is valid still to make complaints and point out ways to improve it, and even to mention that it seems to be deteriorating. RE the mechanisms that allow improvement; you mean writing a letter to your congressman as a 'shocked and appaled' citizen?
Re other countries. It's a valid argument to make a comparison on a certain point. For example if you say that we have to have the government to run airports and roads, and I can show how private companies in other countries can do it better than governments, then you point is invalid. In fact here's a good article about how privitization is even happening in the States:

If something is necessary it is never evil; If something is evil it should never be necessary

I think we differ in the way we would imagine the privatization of public services as leading to something "better". There is the matter of motivation.

With the road system, for example, the public sector should ideally get an acceptable job done at minimal cost, and with minimal staff. When you privatize such a system, the motivation is to maximize both expense and profit-- and pass those costs along to the consumer.

Maximize expense? Of course. You have friends, they like to get extra business, and they can always give you kickbacks for the contract. Maximize profit? Surely I don't have to spell this out for you.

Then there are the army of toll booths or EZ Pass stations to be built. The only remedy would be to increase competition. Should we then build two, or three road systems? Would that save us any money?

Private enterprise is a very good thing-- in its place. Certain other jobs quite rightly belong in the public sector. Policing and justice are among them. And yet other should lie in the middle-- private with deep public oversight. Power generation and the utilities would be such an area.

My representative solicits my opinion, and then listens to it. Very often I find later that he has acted on it. That's why I always vote to re-elect him. It's one of those rare examples of democracy actually working as intended.

You still haven't told me your own favorite venue. Where do you prefer to conduct your business?

our private parts.
I wonder if you even read that excellent article:
where they discuss how they have handled issues like how much prices can be raised, maintenance shedules, etc. Remember, some guys said the the city wouldn't even maintance that turnpike as much as the company must. Then you ignore all the problems of governments doing the jobs like overpaid unions putting a stranglehold on the local government say, or demanding huge pension and other benefits, etc. Even power gen in many countries is now private and doing better than it had been. Re my business, I'm retired and old, so I just invest in shares, all over the world. For example I even own some of the Macquarie Bank outfit that bought the iowa road mentioned in the article. And lately i've invested in many more such infrastructure companies, since it's a growth industry, even in countries such as red china and india. So I have lots of investments in the US as well.

This is a good article, however:

1) You assert that the tax effects apply equally to hedge funds as to VC and buyout funds, which return mainly long-term capital gains. Hedge funds typically return a mixture of long term, short term, and interest and dividend income, so the issue is less relevant to them. Less tax revenue would be gained by changing the rules on the general partners of hedge funds. Indeed, hedge funds could change their payout structures to give the long-term tax benefits to the limited partners, leaving tax revenue flat.

3) Taxing long-term gains (positions held for "a year and a day") at 15% while short-term holdings are taxed at 35% marginal rates gives investors strong incentives to close losing investments before a year is over and hold on to profitable investments for more than a year. Investors can hardly ignore their tax situation in the face of that.

4) Wouldn't we be better off fighting to lower the top tax rate (35%) than to maintain the distinction between types of income? If 15%/35% produced no more revenue than say 25%/25%, wouldn't the latter be viewed as more fair? And intuitively wouldn't it be less distortive of the economy? Little evidence is offered that favorable tax treatment for long-term gains is desirable.

necessary evil
It's only necessary in your opinion and that of others who want to use force to take our money. The only taxes that are not evil are voluntary ones. For example most people would pay a contract tax, say on a house, so that's it's ensured and guaranteed to be your property, and protected by the state. But many around here want to government to use coercive deadly force to collect taxes for their unnecessary pet project like the $2billion or so for NPR/PBS, and they want 90 old men who have never had children, to pay for dysfunctional public schools to brainwash the kids.

We love paying extra
Let's begin with the obvious: you can have overcharges, kickbacks and inefficiencies whether the road project is public OR private. So that keeps the two approaches head to head.

And you can have cost efficiencies being sought by committed public servants OR from private employees, given the proper incentives and decent personnel. So we are still head to head.

Where do private roads fall behind? Three areas. First and foremost, the inefficiency and infuriation that follow from always having to go onto a new road, and get levied by a new toll taker. In colonial times American roads were like this. So at the time of independence it was unanimously decided that the new nation would move for greater efficiency, and make the roadways and their maintenance a public responsibility.

Since then we have been the better for it. Second, there is the added expense of physically collecting the tolls themselves, requiring either an army of attendants or hundreds of pieces of computerized equipment. Extra, and needless, expense.

Finally, profit. Private enterprise sees the need to tack on a minimum of eight cents to every dollar of cost they regain. And nowadays I'm sure they're aiming much, much higher than that. This is a needless expenditure to put on the road user.

But by all means, continue living in Macau, or wherever the hell you are, and drop quarters into the turnstile every ten or twelve miles as you go about your day.

BTW union wages, pensions and benefits are all things of the past here. And have been for a great many years-- you must have left before the 1980s.

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