To cure that problem, I propose that private equity firms and their bankers pay the future costs. To implement this, my suggestion is that rather than raise the tax rate on private equity carried interest, Congress should require deal originators -- which include private equity firms, M&A advisors, and corporate capital providers -- such as bankers -- to keep half of their annual bonuses in an escrow account for 10 years.

If the deals they originate do not collapse, then the deal originators receive the cash in the escrow accounts. If the deals collapse, the escrow accounts are used to cover the cost of making up the losses from the bad deals. Since those funds in escrow are at risk to the bankers, then if the bankers ultimately receive those funds, they should be taxed at the capital gains rate.

There are two benefits to my proposal. First, it will increase the odds that the industry bails out its own problems rather than shifting those costs to society -- this will help balance the Federal budget during the impending down phase of the private equity cycle. Second, by shifting the cost of its mistakes to the deal doers, they will think twice before financing shaky deals -- knowing that it will cost them money.

My hunch is that the proposal to increase the tax rate on carried interest will not pass into law. My proposal might have a better chance -- but I don't know what impact it would have on the Federal budget.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.