Private-Equity Pigs

By Michael Kinsley

Is there something Henry Kravis wants but can't afford to buy? Seems unlikely: according to Forbes, he's worth $2.6 billion. So is he addled by greed or what? Kravis, Stephen Schwarzman and other princes of private equity (the financial deal of the moment) have been visiting Congress and wielding their checkbooks in an effort to save a tax-code provision that allows them to pay an income tax of 15% rather than the normal top rate of 35%. Have they lost their minds?

Ordinarily, the concept of greed isn't very useful in trying to understand the economy. We are all greedy. We'd all like more. The magic of capitalism turns our individual greed into general prosperity. But maybe an especially virulent strain of greed is spreading, something like bird flu. Maybe this is a greed so profound that it blinds its victims to their obvious self-interest. Maybe this greed can turn the brightest men into fools. It's hard to think of any other explanation.

The provision Kravis and others are lobbying to save is spectacularly unfair. These billionaires enjoy a lower tax rate than the people who clean their toilets. Oh, sure, arguments can be made for this. These arguments usually turn on the metaphysical distinction between ordinary income and capital gains. And there are counterarguments challenging this artificial distinction, in general or in this particular case.

But why are we even having this discussion? The private-equity gents may truly believe the world is a better place if they pay less in taxes. But they surely know that their case is not obvious or airtight, and it looks just awful. To be specific, they look like pigs. Worse, they look like unpatriotic ingrates who won't share with their country even a fraction of the blessings that it has bestowed so spectacularly on them.

Maybe these characterizations are unfair. If so, these guys are truly fools. They are trading away something they crave (respectability) for something they have no conceivable use for (more money). They are not fools like the plutocrats who cursed the New Deal while it saved capitalism. American capitalism is in no danger. They are fools who, in search of dignity, give their gangs ludicrous Savile Row names like the Blackstone Group and the Carlyle Group. They plaster their real names on the walls of institutions dedicated to culture, health and other noble things, all in efforts to sanitize their money. Or--let's not be cynical!--in sincere efforts to show gratitude and share the wealth a bit. And then they still end up having to wonder whether every stranger they pass on the street is thinking: What a selfish jerk.

I know that's what I'm thinking. And I didn't start out that way. I'm certainly open to persuasion that these private-equity deals are on balance a good thing, that they clear the cobwebs from dusty corners of the economy. But that doesn't mean they need or deserve a huge tax break. Tax breaks aren't free. Lower taxes on Stephen Schwarzman mean either higher taxes on somebody else or a bigger national debt.

I don't even mind that these players discovered and exploited a loophole to reduce their tax bills. No one is under any moral obligation to pay more taxes than he or she legally owes. (And I hope the lawyer or accountant who figured out how Blackstone could call some of its income a capital gain when calculating its taxes and then relabel the same pile of dough as ordinary income when computing its deductions, as reported last week in the New York Times, got a big, big bonus.) For years, these folks got away with murder. Congratulations. But then, when the sheer size of their incomes draws unwanted attention, instead of a sheepish grin and an "O.K., you caught us," they decide to use the power of their money to keep the racket going. At that point, I think, Who cares how many cultural centers these guys may have financed? Screw them.

It's truly a mystery. Peter G. Peterson, a co-founder of the Blackstone Group, was one of the great deficit bores of the 1980s and 1990s, warning about the huge gap between what society had promised people and what would be available to keep those promises. (He was right, but it was still boring.) Peterson made $1.88 billion when Blackstone went public last month. Here was an opportunity for statesmanship that you would have thought Peterson would be unable to resist. Like Warren Buffett and Bill Gates Sr., he could be the rich man who speaks the truth to other rich folks about the need to pay their taxes. Yet there has been silence from that corner. Maybe Peterson has found a better use for his billions than securing his reputation for vision and honesty. What that could be, I cannot imagine.