We're less than one week away from the election, and hopefully less than one month away from knowing who won the election. In the interim, private equity investors are beginning to contemplate life under a President Biden.
The big picture: Biden would be worse for private equity than President Trump, at least from a structural tax perspective.
- Biden has pledged to raise taxes on successful private equity investors, primarily by eliminating the beneficial tax treatment of capital gains for those making over $1 million per year. Moreover, the top ordinary income tax rate would rise from 37% to 39.6%, which is a far climb from the current capital gains mark of 20% for high earners.
- Biden also has pledged to increase corporate taxes, including a new minimum tax on book income. Not only would this impact portfolio companies, but also those listed buyout firms that recently converted from partnerships to C-corps.
- In short, the rich would pay more. And private equity investors are rich.
What Biden hasn't discussed, though, is touching the deductibility of interest on corporate debt. This is the real meat of the private equity business model, whereas carried interest taxation is the dessert.
- President Obama proposed to reduce this deductibility in an ill-fated 2012 corporate tax reform plan, which also would have cut the then-corporate tax rate from 35% to 28% (Biden now proposes raising it from 21% to 28%).
- But interest deductibility isn't in Biden's plans. At least not yet. And it might be politically difficult to implement, given how much debt companies have added during the pandemic.
- Former Obama administration economist Jason Furman recently wrote in the WSJ: "A President Biden would likely refine his proposals in office. I would like to see him do more to encourage investment by expanding and extending business expensing and further limiting the deductibility of interest."
The private equity argument for Biden is twofold:
- He'd do a significantly better job on COVID-19, creating a rising tide that lifts all boats.
- He'd have a more orderly trade strategy. Even if many of his policies align with Trump, particularly on China, his tactics would be different and (theoretically) more productive.
Money game: Private equity investors have made more direct contributions to Democratic candidates and causes in 2020 than to Republican candidates and causes, by a 59%–41% margin, although more of their soft money donations have gone to GOP-supportive PACs.
- Don't read too much into individual contributions when it comes to business priorities, particularly since most PE pros live in "blue" geographies and have a demonstrated ability to separate their personal and professional politics.
The bottom line: Private equity usually manages to overcome the politics of the moment, but a second Trump term is its easiest path to future success.
