It’s going to be illuminating to see how Senators Schumer and Clinton weigh in on the debate that is starting in the Congress over the question of how to tax profits in the business of private equity. The New York Times has leapt in with an editorial yesterday on the formula of what it calls “2 and 20,” wherein venture capitalists and buyout specialists collect a 2% fee on assets they manage and 20% on any profits. The Times is concerned, as it says others are, that under current law it is permissible to treat the 20% as capital gains that are taxed at only 15%. It frets that the rules were developed “before private equity became the force it is today, and mainly with small business and real estate partnerships in mind.” It reports that “some lawmakers” — Senators Baucus and Grassley, in particular — have begun to question whether the rules should apply to private equity. And it goes on to question whether capital gains taxes should be so low in the first place.

This would be like the Detroit News coming out for higher taxes on cars. Or Mr. Baucus’s home town newspaper in Montana coming out for higher taxes on cattle and wheat, and Mr. Grassley’s hometown paper in Iowa plumping for higher taxes on corn. Private equity and other funds based on the 20% formula — or something similar — have emerged as a major hometown industry in New York City, which is where we find, among other major funds, Kohlberg Kravis Roberts & Co. and the Blackstone Group. Why the Times is intent on attacking them is anyone’s guess, other than the Times’s innate hostility to what smartertimes.comused to call the “non-Sulzberger rich.” It’s been reported that the New York Times Company looked at taking itself private as part of its exploration of how to get the corporate governance watchdogs at Morgan Stanley off their back. Having apparently rejected the idea, at least for now, the paper wants to raise taxes on the private equity managers. Maybe some Timesmen are jealous of the money their former colleague Steven Rattner is pulling in over at the Quadrangle Group.

At a time when everyone from Senator Schumer to Mayor Bloomberg to Governor Spitzer is frantically trying to figure out how to lift the threat to our local economy from Sarbanes-Oxley, it strikes us that a tax-increase aimed specifically at one of our biggest industries is nuts, though not surprising with the Democrats in control of Congress. It’s not in anyone else’s interest save for jurisdictions like London that covet our business. Moreover, it’s also counterproductive in terms of revenue, given the astonishing boom in revenue in taxes on capital gains that has followed the reduction in the capital gains tax rate in recent years. One of the places this is sketched is in a letter sent little more than a year ago to Mr. Grassley from Donald B. Marron of the Congressional Budget Office. Mr. Marron’s purpose does not seem to be to link the surge in capital gains realizations and tax revenues to the reduction in rates. On the contrary, his purpose seems to be to sketch the complexity of the problem. But the fact is that the revenues have been surging in the wake of the reductions in the capital gains rate. This is a phenomenon that needs to be understood before one considers permitting the tax rate to move upward on any sector of capital gains, but particularly one on an industry so important to New York.