Man, I wish I'd thought of this:

Oh wait, I did. Woohoo!

A UPenn law professor says PE firms will find work-around to changes in tax code:

http://dealbook.blogs.nytimes.com/2007/08/23/how-much-would-a-private-equity-tax-hike-raise/

The paper itself is here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007774

His discussion of the alternative structures of PE firms under a new tax regime is of interest -- he approaches, but does not fully articulate, what is the key here -- that a change in tax regime would change the balance of power between GPs and LPs, and force a change in the negotiations between these parties.

Why, then, do people say stuff like this:

“If you tax the managers more heavily, they’re going to take a bigger bite out of what goes to the investors,” added Harvey Leiderman, a pension attorney in the San Francisco office of Reed Smith LLP. “You may intend to tax Wall Street and end up taxing Main Street,” he said. (http://www.pionline.com/apps/pbcs.dll/article?AID=/20070528/PRINTSUB/70525063/1031/TOC)

This is just not true. If you tax managers more heavily, they may ask LPs for "relief" - either in existing funds or future ones. But LPs only have to grant that relief in negotiations if they feel it in their interests to do so; i.e., if good managers have other opportunities equally or more valuable than the partnership arrangement with LP investors.

It is possible, I spose, at the margin, that some manager will choose to ply their skills for an investment bank or an advisory shop instead of a private investment manager if they can't keep more of their income. But it is tough to imagine a mass exodus from PE or hedge funds if, instead of keeping 85% of your $6 million bonus, you keep 72% (the max Alternative Minimum Tax rate for individuals is 28% I believe). Especially when your $6M bonus at a big investment bank you also keep 72% (and leaving aside that your $6M bonus may only be $3M, and your commute is the 2-train and not the Merritt).

In negotiations, managers would have no superior alternative to staying put and paying the higher tax rate. At which point, LPs need not sacrifice a PENNY.

I don't know who Harvey Leiderman is. But he's full of shit.