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Illustration: Sarah Grillo/Axios

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:

  1. He'd do a significantly better job on COVID-19, creating a rising tide that lifts all boats.
  2. 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.

Go deeper

Dan Primack, author of Pro Rata
Jan 28, 2021 - Economy & Business

NBA signals further interest in private equity funding

Illustration: Sarah Grillo/Axios

The National Basketball Association is opening the door a little wider for private equity funds, which to date have been largely excluded from investing in its franchises.

Driving the news: The league's board of governors has approved a framework whereby a PE fund could own up to 20% in a single franchise, and stakes in up to five franchises, as first reported by Sportico and confirmed by Axios.

Pelosi calls raising the debt ceiling a bipartisan responsibility

Photo: Samuel Corum/Bloomberg via Getty Images

House Speaker Nancy Pelosi (D-Calif.) issued a "dear colleague" statement Sunday evening, calling on Congress to act in a bipartisan manner to raise the nation's debt ceiling.

Why it matters: Congress is fast approaching an October deadline to raise the nation's debt ceiling and avoid a government shutdown. But the issue has become a thorny partisan stand-off.

3 hours ago - Politics & Policy

Beto not even best Dem against Abbott

Beto O'Rourke speaks at a rally at the Texas State Capitol in June. Photo: Sergio Flores/Getty Images

Actor Matthew McConaughey’s nine-point lead in a theoretical matchup against Greg Abbott shows just how vulnerable the hard-right Texas governor could be in a general election.

Why it matters: Abbott has won conservative accolades for his abortion, mask and vaccine bans. Axios reported Sunday that former Rep. Beto O’Rourke is preparing to announce a gubernatorial challenge — but a recent poll shows he’s not even the most popular Democrat in the state.