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Private Inequity: How a Powerful Industry Conquered the Tax System
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Private Inequity: How a Powerful Industry Conquered the Tax System

Jesse Drucker and Danny Hakim
The New York Times, 2021
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Private equity always seems to win at the tax-avoidance game. That’s unsurprising for a sector that retains attorneys able to run circles around their counterparts at the understaffed US Internal Revenue Service, and that deploys a bevy of well-heeled lobbyists to quash government attempts to curb the industry’s questionable practices. In this eye-opening article, journalists Jesse Drucker and Danny Hakim report how changes in US tax law continue to redound to private equity’s advantage.

Summary

Private equity’s ability to pay lower taxes stems in part from the nature of its compensation.

Private equity (PE) firms’ compensation has given the industry a rich advantage. In addition to a fee that is typically 2% of assets under management, PEs retain 20% of any investment appreciation. This latter take is referred to as “carried interest.” The US Internal Revenue Service taxes this income at the capital gains rate of 20% rather than at the maximum income tax rate of 37%.

The cost of this loophole to the Treasury Department will total some $130 billion to 2031, prompting renewed interest from legislators and...

About the Authors

Jesse Drucker and Danny Hakim are investigative reporters at The New York Times.

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