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Private Equity Tax Could Do More Bad Than Good

Harvey Pitt, former SEC chairman and founder and chief executive officer of Kalorama Partners, told CNBC’s “Power Lunch” that a new tax aimed at private equity firms like Blackstone Group will hurt pension funds and the investing public.

“This proposal reflects a real deep-seated concern about private equity firms,” Pitt said. “I think there are real issues that need to be explored. I think the way this bill goes about doing it, unfortunately, may have more detrimental effects than positive. It’s not clear to me that it will actually increase tax (revenue). It might end up reducing (revenue). It is also possible, depending on what other countries do, that we drive a lot of private equity firms off shore.”

Sen. Max Baucus, D-Montana, and Sen. Charles Grassley, R-Iowa, on Thursday introduced a bill to tax private equity firms the same way corporations are taxed. If signed into law, it would take effect in the 2013 tax year and more than double the tax rate of private equity firms.

Blackstone said the measure, if enacted, would cause a “material increase in our tax liability”. Blackstone plans to launch its IPO later this month and is expected to raise an estimated $3.87 billion to $4.13 billion.

"I think in the end the investing public, pension funds and trust funds will be hurt because a lot of these entities will simply move overseas," Pitt said.

Damon Silvers, associate general counsel for the AFL-CIO, said the bill is needed to assure tax fairness.

“To say they’re not publicly traded investment companies, they don’t want to be transparent, they want to operate in the way Blackstone wants to operate--then they ought to be taxed as regular companies,” Silvers said. “The notion that we should have tax subsidies for a handful of private equity firms doesn’t make any sense to us.”

He brushed aside concerns that the new tax would make U.S. equity markets less competitive and drive private equity and hedge funds off shore.

“Whenever we ask the wealthiest people in our society to bear their fair share of the tax burden, we always hear about competitiveness,” Silvers said. “What’s competitive for our country is to have a fair tax base and a strong securities regulatory system.”