Private equity firms invest middle-class pension money in brain-dead schemes, steal taxpayer money, strip the companies they buy of workers, collect huge paychecks and pay little or no taxes. The average secretary at one of those firms pays a higher tax rate (35%) than the partners at a private equity firm (15%).
Some in Congress want to rectify these glaring inequities and simultaneously get valuable, well-deserved revenue to fund social programs. But others in Congress (including some who are quite vociferous in Senate Judiciary Committee hearings) flatly refuse to change the status quo.
Just the whiff of change in the air sent some celebrity private equity managers to Washington. Henry R. Kravis, who is the billionaire founder of the corporate buyout movement, is roaming the halls of Congress hoping to kill the legislation that would raise his taxes.
To cite only one example of corporate welfare, $15 billion per month of taxpayer money goes to pay for the wars in Iraq and Afghanistan. The Democrats are looking for additional revenue to help finance educational tax credits, broaden health programs for lower-income families and other initiatives to improve the lot of the American people.
Henry Kravis has some good connections, though:
Kravis' ties to the Bush family go back decades to the time when his father was friends with Senator Prescott Bush, the president's grandfather.
The army of lobbyists sent to fight the legislation find the decision to raise the tax rates to match that of ordinary workers very unfair. Wayne Berman, managing director at Ogilvy Government Relations which is a major Republican fundraiser, said, "It will be a fight about the fairness of capital gains having a lower tax rate. It will be about rewarding risk and recognizing when you reward risk you create economic growth."
What the hell kind of risks does this Berman (and, I might add, many Congressmen) speak of? Private equity companies like Blackstone or Kravis Kohlberg don't use their own money to buy a public company and take it private. That's why what they do is called a leveraged buyout, leverage a fancy word for "debt". They borrow Other People's Money (OPM) and they have no trouble getting it. Banks fall all over themselves scrambling to lend them money at a debt/asset ratio of 10 to 1 or even 15 to 1. So if Kravis wants to buy Chrysler for $65 billion, it puts in $100 of its own funds and borrows $2000. Then it can buy a piece of Chrysler for $2100.
Kravis isn't taking a risk. The investors who buy Kravis' bonds are, especially if they bought subprime mortgage-backed securities which are valuable in a Wall Street fantasyland/braindead sort of way if you believe people with lousy or no credit can keep up with escalating mortgage payments. These bonds have plunged in value during the last 6 months until their worth resembles that of the German mark during the Weimar Republic, when 1 million marks couldn't buy a loaf of bread.
But I digress. Wayne Berman then complains about capital's adversary, labor:
This is about the AFL-CIO's longstanding policy objectives of ending the beneficial tax treatment of risks versus the treatment of wages from work. It is not about Steve Schwartzman's birthday party.
Who the hell is Steve Schwarzman and what is it about his birthday party? Too many candles? Schwarzman is the chairman of Blackstone, a prominent private equity firm. As reported in the New York Times and the New York Post, glittering guests like Barbara Walters and Vernon Jordan piled into the Seventh Regiment Armory, which is a huge space on Park Avenue in New York City. The place was decorated like the Hall of Mirrors at Versailles. There were non-stop gourmet meals, free flowing wine and a $1 million concert by Rod Stewart. The party was estimated to cost $3 million.
As Damon Silvers, associate general counsel at the AFL-CIO, which has been lobbying in support of increasing the tax rates, said:
The tax subsidy to the wealthiest Americans created by these lower rates on equity funds is a significant drain on the ability to do important things for the good of the country. The top 25 individuals in the industry got paid over $10 billion taxed at 15%. These 25 people got paid 3 times the amount that was paid to all 80,000 people who teach in New York City schools, and they paid roughly one-half to one-third of the taxes on a percentage basis.
An article in the N.Y. Times blog Dealbook mentions legislation introduced by Charles Grassley (R-IA), the ranking Republican on the Senate Finance Committee, which will tax the enormous fees taken by private equity firms on their investments as ordinary income, at 35%, the same as every ordinary wage earner pays. The question is, should the 20% fees that these firms collect be considered capital gains or regular income? The writer says, regular income, no doubt about it:
The Internal Revenue Service should clearly be considering it regular income. After all, [the private firms'] own money is not at risk--it's a fee.
Let's be honest: it is a charade that private equity firms have claimed their 20% performance fee at the lower capital gains rate. To qualify, they invest a nominal amount of their own money to demonstrate that they have put something at risk, but it's a ruse. They are paying capital gains rates for doing their job, which should be taxed at the regular income rate.
You would think that all the buyout kings who wear American flags on their suit lapels would be proud to pay a big tax bill.
Unfortunately, private equity firms are swimming in cash. They have strong connections with both parties. They gave millions to presidential and Congressional campaigns. They are counting on the support of powerful Democratic lawmakers who rely on Wall Street as a major source of political contributions. The lawmakers include Senators Chuck Shumer and Chris Dodd, and Representative Rahm Emanuel. So far they haven't taken a public position on the bills.
Let them know which way the wind blows (or the bell tolls). If Congress sells us out on this golden, righteous opportunity to fund necessary programs, then money does make law (d'oh!).