Private Equity

Here We have a Case where a practice should never has been started in the first place. Private Equity fees are Income, and the fees should have been registered as Income from the start. Capital Gains consist only of profits on Investment. The problem is the same problem there has always been: the separation of Income registry defining a difference between Earnings and Profits. The distinction does not exist in fact. Sound Investment, no matter how it is examined, is nothing more than a Job in progress. All the elements for sound Investment require the same attention and effort to achieve as does any other form of labor. There is no question of any form of double taxation which is viable, the original claim for the separation of the two forms of Income. It is simply another Job which is performed. The advent of the 401(k) system further complicates the Tax Code, attempting to give initial Investment the same advantage of less taxation as enjoyed by Private Equity. Real truth states there has never been any evidence that Income separation leads to better or more gainful Investment, though the 401(k) system has assuredly provided an oversurplus of liquidity in Investment funds; something which has lowered the Productivity of Investments overall, led to funding of poor Investment options causing overconsumption of Productive resources, and shrunk tax revenues of both Income and Capital Gains.

The simple transference of Capital Gains into Income would eliminate the Charade which causes such injury to the economy. The current distinction is artificial in nature, and does not truly serve the advantage of either Government or Taxpayer. The reduced taxation of Capital Gains generate pressure to raise Income tax rates to make up for the shortfall in tax revenues because of the reduced tax rates of Capital Gains. Transfer of assets into Capital Gains incites Transfer fees for the individual Taxpayer, a hidden form of taxation charged to avoid taxation, such Fees excessively high because of the protected volume of tax avoidance; these Fees later unavoidable, if the Taxpayer desires to maximize his Income through Investment transfers. Government tax revenues lose in all cases because of the distinction between Capital Gains and Income.

The real question of maintaining the distinction of Capital Gains revolves upon the potential impact of liquidity loss in Investment. The existence of the distinction between Capital Gains and simple Income Tax is known to generate excessive liquidity, but would elimination of the distinction excessively restrict liquidity in the Investment markets? Practically every Economist would have a separate answer for this Question, Most suggesting there would be a rapid and vicious constriction of Investment funds. But would there be such a decline? It is obvious there would be a transfer of funds back into Bank Deposits, a safer and more favorable Investment with the introduction of a higher taxation upon the added Risk. Here the Question must be asked whether this Transfer of funds would exceed the natural over-liquidity of current Investment. One must remember the Banking system is of basic design to promote Investment opportunity through underwriting Investment; could it not be true that the Banking system would retake its natural position as the normal Private Equity agency? lgl