Thursday, July 5, 2007
The Financial Times published an interview yesterday with Chancellor of the Exchequer Alistair Darling. In the interview, Darling ruled out an imminent change to the taxation rate of private equity in the United Kingdom. He stated
I think we should be very, very wary indeed of a knee-jerk reaction or a reaction to a day’s headlines into making a tax change that could result in unintended consequences and undesirable consequences . . . .
In the United Kingdom, the carried interest earned by private equity partners on their investments is treated as capital gains and entitled to taper relief. This often reduces the rate to 10 percent compared with the U.K.'s 40 percent rate on income. The system has come under heated criticism in recent months, with one private equity boss decrying the system, stating that private equity "enjoy a lower tax rate than that paid by a janitor." Note that there is a similar, less-public debate about similar tax treatment enjoyed by U.S. private equity firms (for more on this read Victor Fleischer's Two and Twenty: Taxing Partnership Profits in Private Equity Funds).
Interestingly, Darling drew an analogy to Sarbanes-Oxley to support his position:
I am reminded of Sarbanes-Oxley in the US....and they’re now looking at how they can get out of it. There is no doubt it has damaged the US market, [he said.] When or if we make any changes they must be made at the proper time in the context of the Budget or the pre-Budget report and in the context of making tax reform which is beneficial to the country.
Darling, who is not trained as an economist would likely have been on firmer grounds focusing on the micro effects of such a tax and how it would effect the current incentive structure for private equity managers. And of course there are the redistributive justice aspects. Still, Sarbanes-Oxley still has such a bad name in Europe it was easier for Darling to make this analogy. But, whatever Darling's assertions on the subject, the jury is still out on Sarbanes-Oxley's effects, particularly in light of the numerous foreign ipos in the U.S. market this year.