Wall Street Billionaires Lobby Washington to Preserve Tax Loophole

• E-mail Terry Keenan

So now we know what it's like to watch a bunch of grown men cry. How else could one describe the spectacle in recent weeks as some of the richest men in the world descended on Washington? They were lobbying to preserve a tax loophole that allows them to pay some of the lowest tax rates in the nation.

In case you haven't been following the drama — here it is in a nutshell. For years, partners at private equity firms and hedge funds have been able to bypass the individual income tax rate on their compensation, paying the much lower capital gains tax rate instead.

This means billionaire pashas from Steve Schwarzman to Henry Kravis to George Soros aren't subject to the 35 percent federal income tax rate most high-earning Americans pay. No, they're taxed at the rock bottom rate of 15 percent, the rate levied on long-term capital gains. The fact that much of the capital that is being put at risk is typically that of the investors in their funds, not the managers, somehow escaped scrutiny — until now.

This isn't about capital gains taxes, which should remain low to spur investment. It is about fairness.

While few will argue that the drastic cut in the capital gains rate — to 15 percent — was a much-needed spark for the economy, the wide gap between the capital gains and ordinary income tax rate has had unintended consequences. The question now is being asked whether it fair for a handful of the highest earners in the nation to pay the lowest taxes? It's as simple as that.

And so the spin has begun in an effort to muddy the issue. Over the past month, hedge fund and private equity sympathizers have fanned out across the airwaves to warn about the risks of raising taxes on a few thousand of the richest among us. In solemn tones, they warned that teachers, nurses and firefighters would all suffer as pension fund returns were hurt by the higher taxes on these money men.

Yes, here's the logic: If the hedgeman running your pension fund has to pay the 35 percent tax rate on the multi-millions he makes from running his hedge fund, he will naturally have to raise his fees. Instead of taking 20 percent of the upside he might have to reach for 30 percent. Naturally, it's the "little" guy who will suffer. Huh?

And now, courtesy of the folks at Blackstone who brought all of this into the light of day with its glitzy IPO, word that the private equity firm has figured out how to avoid taxes on what really is a capital gain — the proceeds from its $4.75 billion IPO last month. Yes, through a creative use of good will, Blackstone won't be paying $553 million in taxes on its IPO proceeds — instead it will be getting about $750 million back from Uncle Sam over the next 15 years! So, the Blackstone IPO costs U.S. taxpayers more than $200 million.

The accountants say it's all perfectly legal, but for the folks that invented the best money-making racket in the history of finance, the recent revelations couldn't have come at a worse time. Sure, the money men may prevail in Congress right now, but the tax shenanigans will ultimately prove just too audacious for even their investors to swallow.

Yes, now that the entire world knows just how remarkably profitable (and tax efficient) these funds are, look for pension and endowment chiefs around the globe to speak up and begin negotiating their fees aggressively lower. The folks who run the funds want us to believe that raising their taxes will cut the retirement returns for millions of middle class Americans. In the end, I bet it will force the funds to actually lower their fees, and that would be good news for the rest of us.

Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!