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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

Biden's Day 1 challenges: Systemic racism

Photo illustration: Sarah Grillo/Axios. Photo: Kirsty O'Connor (PA Images)/Getty Images

Advocates are pushing President-elect Biden to tackle systemic racism with a Day 1 agenda that includes ending the detention of migrant children and expanding DACA, announcing a Justice Department investigation of rogue police departments and returning some public lands to Indigenous tribes.

Why it matters: Biden has said the fight against systemic racism will be one of the top goals of his presidency — but the expectations may be so high that he won't be able to meet them.

SEC proposes rules for giving gig workers equity

Illustration: Sarah Grillo/Axios

The U.S. Securities and Exchange Commission has proposed rule changes that would make it possible for gig companies to give equity to their workers as part of their compensation if they meet certain requirements.

Why it matters: This is something gig companies including Uber and Airbnb have asked the SEC to do over the years as a way to share their companies' upside with these non-employees.

Court rejects Trump campaign's appeal in Pennsylvania case

Photo: Sarah Silbiger for The Washington Post via Getty Images

A federal appeals court on Friday unanimously rejected the Trump campaign's emergency appeal seeking to file a new lawsuit against Pennsylvania's election results, writing in a blistering ruling that the campaign's "claims have no merit."

Why it matters: It's another devastating blow to President Trump's sinking efforts to overturn the results of the election. Pennsylvania, which President-elect Joe Biden won by more than 80,000 votes, certified its results last week and is expected to award 20 electoral votes to Biden on Dec. 12.