by Linda Beale
Private equity doesn’t do us much good; avoiding taxes does us considerable harm
cross posted with Ataxingmatter
I. Private Equity, leveraged buyouts, and carried interest
On MarketWatch, David Weidner’s “writing on the wall” column for Nov. 2, 2010 comments on “Paying for Wall Street’s Prosperity: Loophole could cost taxpayers $70 billion“. What loophole? That “carried interest” provision that lets hedge fund and private equity managers get their compensation income with the tax benefits of capital gains rather than ordinary rates. This isn’t chicken feed.
There are lots of private equity deals, and private equity deals have a huge impact on ordinary Americans–for one thing, they frequently purchase by leveraging the company they buy, so that it has considerable debt the interest on which is deductible, lowering the company’s tax bills, at the same time that they frequently “restructure” so that the successor company is likely to fire lots of employees, sell some assets, and then do an IPO a few years down the road to bring in cash to pay off the debt. And many of them will fail–including bankruptcies and going out of business. The benefit (deferral and capital gains preference) goes to the private equity firms that make fortunes out of the deal.
The burden is–surprise, surprise–borne by the ordinary Joe who gets fired or sees his company driven to insolvency or at the least faces job insecurity during the time that the private equity firm is whipping his company into shape for selling at a profit. The burden is also borne by taxpayers generally and the kinds of public goods we would like to fund with tax money (from parks to disease research, from environmental enforcement to insider trading enforcement, from new roads to better cargo searches, etc.)–as Weidner notes, all those equity deals result in firms that pay less income tax per dollar of pretax income–about 14.2% less, in fact– than their counterparts that haven’t been taken over by private equity firms, because of the way the private equity firms profit by leveraging their purchase with the company’s own cash flows.
So there’s a pretty good argument that private equity firms are harmful to the economy, not helpful. They for sure don’t create jobs (and often cause job loss). And there’s prety good evidence that we create a tax break (by allowing the interest deduction for leverage used to allow private equity firms to buyout the company ) that isn’t justified. And then there’s that tax break for carried interest. Why are we giving so much to companies that give us back so little? Weidner’s answer–they’ve got lobbyists. $51.5 million over the last four years spent on lobbying, compared to a mere 7.7 million from 2003 to 2006. Blackstone and KKR spent $3.78 million this year alone. Id. (And they’ve got the ability to contribute money even more targeted to electing the Congress they want, after Citizens United. $10.6 million for the midterms, through Oct. 25, Weidner reports, based on OpenSecrets.org. data.)
II. the “Increase Our Taxes” Blog
There’s a blog I just discovered, titled “increaseourtaxes.com”. Uneven items, but some worth looking at. For example, see the post on “Tax Cuts and the Well Off“, which shows graphically (from the Tax Foundation) the impact of Obama’s proposed changes–mainly in higher amounts of tax from those earning a million or more, or “California and the Politics of Taxes ” (nov. 1, 2010), which notes the problems that occur when “voters want services but do not want to pay for them”. IN conclusion, he shows how all efforts to avoid taxes devastastes society.
“This is what happens when you try to avoid paying taxes. Politicians, hemmed in by public opinion, look even slimier as they cut deals to balance a budget. Voters kick those politicians out but don’t change the rules of the game, so the new politicians look just like the old ones, just like in Animal Farm. Revenue is raised indirectly and inefficiently, distorting the economy, reducing overall income and tax revenue, and eventually requiring the government to furlough teachers and fire fighters and cut popular services. Refusing to pay more in taxes hastens the end of exactly what we want to pay taxes for.”