Wednesday, May 09, 2007

Pirate Equity?

Robert Reich over on his blog explains how mega millions of dollars are made by private equity partners.

Way back in the 1970s, newly-minted MBAs with dollar-signs in their eyes wanted to be CEOs. Then in the 1980s wanted to go into investment banking, because the money was even better there. In the 1990s, they went into high-tech venture capital and dot coms. Now it’s private equity. Becoming partner in a private equity firm is also the new dream of every CEO in America.

That's because the average big-company CEO has to do with a measly $7 million a year, taxed at 35 percent. But private equity partners are raking in hundreds of millions a year, taxed at 15 percent – less than the tax rate paid by middle-class Americans.


We’re talking billions of dollars here, folks. And it’s only taxed at 15 percent because even though it’s most of their compensation it’s treated as a capital gain. And courtesy of the Bush tax cuts, capital gains are taxed at 15 percent. Of course, those billions are what these guys pay themselves for their work. It's their compensation.

When capital gains are taxed at less than half the tax rate the rich pay on their incomes, you can expect this sort of gamesmanship.

Now that the tax-writing committees of congress are taking a look at this giant loophole, they’re besieged by private-equity partners who are, of course, screaming: No! You can’t do this to us! If you treat the money we’re making as compensation, you’ll reduce our incentives! We won’t work as hard if we’re taking home only 60 million dollars a year instead of 80 million! And that will cripple the American economy.


A commenter by the screen name "RodgerRafter" referred to it as "Pirate Equity":

I'll add that private equity (aka "pirate equity") often involves laying off large numbers of people, cutting costs to the point quality suffers, burying companies under debt, and other economically damaging tactics.


Then there's the "inflation tax" that effects everyone. Pirate equity firms borrow new money into existence in order to take these companies private. They inflate the money supply and syphon off huge sums as personal compensation. All the while, the cost of everything goes up as the value of a dollar goes down.

Private equity and hedge fund borrowing are the main things propping up the stock market these days. That won't last forever, but for now it's hiding the real economic damage that is being done.

I am not sophisticated enough to completely understand how this works; but what I cannot understand on the surface is why the company would need to borrow large sums of money if they cut costs and lay off workers. Wouldn't the company borrow money to expand its operations and workforce?

And something is not right when the highest earning members of our country pay a lower tax rate than middle class Americans.

1 comment:

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