John Snow, chairman of Cerberus Capital Management and former U.S. Treasury secretary, told CNBC’s “Street Signs” that raising taxes on private equity would harm the nation’s economy and erode retirement benefits for many working people.
“It seems to me that it’s Economics 101 that if you put a higher tax on something, you’re going to get less of it,” Snow said Wednesday.
“We always tax things we want to discourage. Why anyone would want to discourage capital formation and the important work that private equity does in revitalizing underperforming companies, and thereby making the American economy more efficient -- it doesn’t seem to me that’s good policy.”
The Senate Tax Committee held its first hearing Wednesday on taxing “carried interest,” or the profit earned by private equity and hedge fund managers. The money is typically taxed at the 15% capital-gains rate, because the law now views such profit as investment income rather than earned wages. A bill in the House would declare such profit ordinary income, and tax it at rates as high as 35%. The Senate may offer a similar measure.
In making tax policy, Snow said Congress should continue to draw a distinction between earned income and return on capital.
“[There is a] clear distinction between ordinary income and return of capital,” Snow said. “The capital is at risk, and there is no return to the private-equity firm, unless the investors are rewarded.”
He said boosting taxes on private equity would mean less activity by private-equity funds, in turn hurting the people whose retirement funds have invested in private-equity firms.
“You always get less of anything you tax,” Snow said. “That’s a fundamental principle. Private equity is providing a means for school teachers, state employees, firemen and policemen -- that broad cut of Americans -- to get better retirement than they would otherwise have. If you tax it, then you’re going to be adversely affecting the ability of average Americans to have better retirements.”