Tuesday, January 24, 2012

Romney's Private Equity Privilege

Free Enterprise According to Mitt Romney
Whenever Mitt Romney is attacked for having been a corporate raider at private equity firm Bain Capital, he deflects the criticism claiming it is an attack on free enterprise. So, Newt Gingrinch, Rick Perry, and President Obama are against free enterprise. Who knew? Panderbear considers Romney's response a transparent pander.

While 'free' enterprise must be free of undue constraints that do not serve a higher public policy interest, it must also be free from privilege so that all enterprises compete on an equal footing. The problem is private equity firms benefit from at least two privileges that other free enterprise competitors do not.

Private equity firms are by nature more highly leveraged than other businesses. They borrow huge sums to finance buyouts. The interest they pay on those loans affords them exceedingly favorable tax treatment. Current tax codes encourage leverage and thus extend a competitive advantage to private equity.

Private equity also receives preferential tax treatment on "carried interest." Carried interest or carry, is compensation received by an investment manager from profits of a successful investment partnership. Carried interest is taxed at capital gains rates rather than much higher ordinary income rates, even if the manager has invested little or no capital of his own. That's a really sweet deal if you can get it.

But what of Mitt Romney? He simply availed himself of legal tax loopholes, right? Well, the question is, how will the electorate see things? Will they view him as a legitimate businessman or as a privileged fox in the chicken coop. The fox isn't evil. It just does what's in its own best interest. The American people may decide to hold Mitt Romney to a higher standard.

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