| Statement of Leo Hindery, Jr., Managing Director, InterMedia Partners, New York, New York Testimony Before the Full Committee
of the House Committee on Ways and Means September 06, 2007
Thank you, Mr. Chairman and Members, for convening this
important hearing on the taxation of carried interest for investment partnerships.
I am Leo Hindery, and I am the Managing Partner of
InterMedia Partners, a private equity fund which I formed in 1988 and ran
continuously until 1997 when I became CEO of Tele-Communications, Inc. (TCI)
and later its successor AT&T Broadband. I returned full time to private
equity in 2001. My business career includes nearly 20 years of direct and
indirect involvement with investment partnerships, and I am intimately familiar
with their history, realities and economics.
Hundreds of thousands of Americans throughout the U.S.
economy work hard every day managing things for other people, ranging from
grocery stores to gas stations to money. All of these managers earn a base
level of compensation, and in addition, most of them earn some form of
performance fee. And except for one group of individuals, all of them pay
ordinary income taxes on their personally earned management income.
I am here today to talk about the management income being
earned by that one particular group, namely those women and men, of whom I am
one, who, using special purpose investment partnerships, manage money belonging
to others. The management income which we earn, which we call carried
interest, is taxed as capital gains, when I and others believe it should
instead be taxed as ordinary income.
And of course because the 15% capital gains tax rate is less
than half the 35% maximum ordinary income tax rate paid by virtually every
other manager and by regular Americans, how this issue is resolved will have an
enormous impact on the nation’s tax receipts, on the order of $12 billion a
year.
This reason this taxes loss figure is so high is simply
because of the magnitude of the earnings which are now escaping ordinary income
taxation. To fully appreciate this, all this Committee has to do is reflect on
the fact that in 2006, the top 20 hedge fund and private equity managers in
America earned an average of $658 million each, which is 22,255 times the pay
of the average U.S. worker. And of course all of these earnings were taxed at
just a 15 percent rate.
I should note that my concern today is not about the
taxation of the operating income earned by any of these special purpose
partnerships, although there is very substantial inconsistency and thus abuse
in how income from operations is currently being taxed from one type of
partnership to another.
And I should further note that while much of the public’s
attention to this issue has been directed at hedge fund and private equity managers,
the management income earned by managers of all investment partnerships needs
to be scrutinized alike: hedge fund, private equity, oil-and-gas, real-estate,
and timber.
It really isn’t all that hard to decide how to properly tax
carried interest. Is carried interest income which a money manager earns on
his or her personal investments, or, instead, is it the performance fee earned
for managing other people's investments? If carried interest is personal
investment income, then it is properly entitled to capital gains treatment –
however, if it is a performance fee, as my 20 years of first-hand experience clearly
tells me it is, then it should be taxed as ordinary income.
Simply put, a very bright line needs to be drawn between investor-type
partners who invest their own money and are thus entitled to capital gains
treatment on the investment income they earn, and manager-type partners who
contribute only their services.
A prominent private equity manager recently contended to
this Congress that investment managers' earnings are (and I quote)
"capital gains in every technical and spiritual sense" (unquote).
All I can say in answer is that no church or synagogue I know would consider it
very "spiritual" to each year selfishly characterize, as capital gains,
billions of dollars of management income that has absolutely no downside risk
to the managers, especially when doing so comes at such a great cost to the
rest of our nation’s taxpayers.
Some of my fellow investment partnership managers also say
that this Hearing is nothing more than a vindictive singling out of their firms
because of their extraordinary success. And they say that increasing the tax
rate on their earnings to the ordinary income level will create an “investment
tax”, of sorts, with dire unintended consequences for the entities whose money
is being managed and for the American economy.
These conclusions are similarly self-serving, and they are
complete poppycock.
Congress is not considering changing the tax rates
on the investments made by investors. Congress is only considering
restoring fairness in how the men and women who manage these investments are
individually taxed compared to other managers and to regular workers. And it
is beyond disingenuous to predict dire unintended consequences when no consequences
at all will occur.
A tax loophole the size of a Mack truck is right now
generating unwarranted and unfair windfalls to a privileged group of money
managers, and, to no one’s surprise, these individuals are driving right through
this $12 billion-a-year hole. Congress, starting with this Committee, needs to
tax money management income, what we call carried interest, as what it is,
which is plain old ordinary income.
I hope my comments have been helpful. Thank you very much
for this opportunity to speak with you today, and I welcome your questions.
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