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The world’s largest private equity firms have avoided income taxes on more than $1 trillion in stimulus payments since 2000 by structuring the payments to subject them to a much lower tax, according to new research from the University of Oxford.
Ludovic Phalippou, a professor at Oxford’s Said School of Business, found that fund groups involved in private investment strategies such as buyout companies, venture capital, infrastructure and distressed debt have made more than $1 trillion in so-called carried interest payments since the turn of the century. century.
Phalippou’s calculation comes as such performance fees have been under political scrutiny for years in the US and Europe, and face a wave of renewed calls to close what prominent politicians characterize as a “loophole.”
The savings amount to hundreds of billions of dollars at current tax rates. Fees are charged at long-term capital gains rates that are significantly lower than income tax rates. In listed companies, as much as half of the returns to shareholders are paid in the form of dividends.
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Britain’s Labor Party is vowing to close the loophole in a bid led by shadow chancellor Rachel Reeves, who previously called the tax treatment “absurd” and said in 2021 she hoped to cut taxes on the private equity sector by £ annually 440 million to increase.
Earlier this year, Reeves pledged to press ahead with a plan to impose the top 45-cent income tax rate on the profits private equity firms earn on successful deals, amid mounting pressure from industry lobbyists. Currently, carried interest payments are taxed at the 28 percent capital gains tax rate.
In the US, recent presidents including Barack Obama, Joe Biden and even Donald Trump pledged to end special tax treatment but ultimately backed away under industry pressure. In Britain, critics of Labor’s plan say raising tax rates will push successful investment groups out of London just when the need to attract foreign capital is paramount.
Phalippou said in an interview with the Financial Times that his research was intended to demonstrate the enormous wealth created by expensive private funds for a select group of influential billionaires living mainly in the US. It is also intended to show governments the potential tax revenue they could generate if such fees were treated as income and not capital gains.
“All governments are talking about taxing carved interest. So my role is to provide the best estimate of the number,” said Phalippou, whose report is titled “The Trillion Dollar Bonus of Private Capital Fund Managers.”
“It shows you the upper limit of what you could collect if all the countries in the world coordinated to tax that pot,” he said. “Once you understand how much money we are talking about, you can understand why private equity is the biggest donor to politicians and universities,” he added.
Phalippou calculates that Blackstone Group, the world’s largest private equity investor, has earned $33.6 billion in carried interest, the most of any investment firm. The windfall has turned top executives Stephen Schwarzman and Jonathan Gray into multi-billionaires, and the duo are among the most influential political donors to Republican and Democratic lawmakers, respectively.
A Blackstone representative declined to comment.
Schwarzman recently expressed support for Trump’s election and will be raising funds among his colleagues for the former president’s re-election campaign.
Phalippou said his work also aimed to provide new information on whether private investment strategies are worth their costs. His report shows that the average private equity fund makes about 1.6 times as much money as investors’ money over four or five years, something he says is comparable to the estimated long-term returns of U.S. stocks.
“It’s hard for me to look at these numbers and be surprised,” he said. “Does it look extraordinary to me? The $1 trillion seems quite extraordinary. The return number, not so much,” Phalippou said. “It’s good, but it’s nothing to write home about.”
Drew Maloney, president and CEO of the American Investment Council, which represents the private equity industry, said: “This study reports that private equity investors generated $5 trillion in returns for retirees. This demonstrates the alignment between investors and managers.”