The simplicity of vulture capitalism

Posted: 23 January 2012 in Uncategorized
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James Surowiecki is probably right: “At this point, the people who run America’s private-equity funds must be ruing the day Mitt Romney decided to run for President.”

The way private-equity firms, like Romney’s Bain Capital, make their profits is pretty simple: they rely on government subsidies.

The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets, deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits. Financial engineering has always been central to leveraged buyouts. In a typical deal, a private-equity firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it or taking it public. The key to this strategy is debt: the model encourages firms to borrow as much as possible, since, just as with a mortgage, the less money you put down, the bigger your potential return on investment. The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust.

One of Romney’s economic advisers, Greg Mankiw, also employs the simplicity strategy in suggesting “a better tax system,” which as Linda Beale explains is “just another variant on the right-wing plan to have the middle (and lower) classes pay all the tax while the rich get richer.” The key is Mankiw’s suggestion that we tax consumption instead of income.

Mankiw obviously has no fresh ideas.  This is the proverbial GOP suggestion–the USA Tax, the “FAIR” tax, the 9-9-9 tax (which would ultimately have reverted to a national sales tax), etc.  Consumption taxes are not ‘better’ than income taxes.  In fact, they are much worse because they are regressive, with their impact being felt most strongly by those with the very least income.  This so-called reform would shift the tax burden off the wealthy rentiers with their unearned income and onto those who labor hard and long for their bread and butter.  Nothing reasonable about it. . .

Fairness is a much more important goal than simplicity.  How come Mankiw doesn’t even mention it?  Oh, I see.  He’s an economic adviser to vulture fund manager Mitt Romney. . .

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