Brad Badertscher, assistant professor of accountancy in the Mendoza College of Business, says, “The current debate about the unfairness of the nation’s tax code and whether wealthy individuals, in particular private-equity managers, pay their fair share of taxes is mainly driven by how the individual earns their income.
“Someone making their living investing capital is taxed at the capital gains rate, which is a lower rate than the ordinary income tax rate the person who cleans the office of the one investing the capital is paying. Neither one should be faulted for paying only what the tax law requires, but if equality is the measuring stick, then the tax code should be reexamined.
“However, before changing the tax code, one should be aware of the possible repercussions,” Badertscher continues. “The argument behind a lower capital gains tax rate is to spur new investment in the economy. And given the current state of the economy, it is not clear that we should further restrict the flow of capital. On the other hand, if the tax code is revised, the additional tax collected could help our current national debt crisis.”
Badertscher, who has studied tax liabilities of private equity firms, also says, “A similar debate about taxes also is being undertaken at the corporate level, as more and more firms are paying a lower tax rate than the 35 percent corporate tax rate. Some of this is due to U.S. firms moving their operations overseas to lower tax jurisdictions. Recent evidence suggests that private-equity managed firms are at the forefront of reducing their tax liabilities. And although the tax breaks these firms obtain are legal, it also suggests that the corporate tax code should be revisited to allow U.S. companies to be more competitive and therefore provide more incentives for U.S firms to keep their operations inside the U.S.
“These issues are not going away and are only going to intensify as we get further into the campaign year.”