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This battle is part of a larger discussion of, in Henry Manne’s phrase, “the market for corporate control.” The tax code is set to over lever firms, which require increases in earnings to go toward debt payments instead of research and development, expansion, and other things that build the firm. What could we change to generate different outcomes? That’s exactly right. Right after this goes on for a few years, you’ve starved your firm of human and operating capital. Five years later, when the private equity leaves, the company will collapse — you can’t starve a company for that long. This is what the history of private equity shows. What I’d like to see Mitt Romney do is to show an example of a buyout that went well. The only success stories he’s talking about on any level are venture capital investments — Staples and Sports Authority. Personally I like venture capital, I think it provides a lot of value, but that’s not what he did mostly, and that’s not what these takeovers are about. The big fix I’d encourage is an end to interest-tax deducibility for leveraged buyouts. The tax system encourages companies to borrow as much as they can. For certain industries, like telecom, these deductions might make a lot of sense. But it was never intended for financing leveraged buyouts. If you put a cap on this you would find buyouts and private equity firms that were much more focused on building companies.

Excellent stuff here.

I copied the last three paragraphs of your link.It really explains things well.

Looks like Mitt is playing fast and lose with the tax code and loading up companies he supposedly is helping with so much debt they fall under their own weight after Bain is through looting them.

You really got to the core of things with this link.Thanks much.

What’s kind of crazy is that author’s book was predicting that the next great credit crisis will come from these private equity-owned firms (which 10% of the U.S. workforce works for). They supposedly got a reprieve because of the quantitative easing going on, but they could start defaulting on a mass scale at some point just like we’re seeing with the mortgage crisis. They are over-leveraged due to the private equity method of making them take out debt so the PE firm can extract dividends and fees. If the time comes that they cannot refinance their debt, they won’t survive. It would be seriously ironic if when that happened, we had as president the very man that pioneered the private equity model, “buyout baron” Mitt Romney. It would be like having Chris Dodd and Barney Frank as President and V.P. during the mortgage crisis.

It is similar to the mortgage crisis in another respect. The mortgage firms pushed loans on people who couldn’t afford them for 2 reasons, so they could extract fees for themselves, and because the government was implicitly backing those loans through Fannie and Freddie. The same kind of moral and economic hazard exists with the private equity firms. The PE firm is at little to no risk of losing money because the system pays for the bankrupty of their acquired firm and they don’t have to pay anything. Yet they are encouraged to put more and more firms into that position due to how easy it is to extract those fees for easy money. Supposedly their ability to do this has slowed down some due to credit tightening, but still 10% of the workforce is employed under this private equity model.

This battle is part of a larger discussion of, in Henry Manne’s phrase, “the market for corporate control.

——I’m willing to hear the argument that the tax code allows or incentivizes strategies that are not aimed at the long term health of a company. This aligns with a conservative viewpoint that the tax code is too complex, destroys jobs and allows the government to screw up markets.

I was apoplectic however when Gingrich seemed to be taking up the Occupy Wall Street meme that capitalism is evil and Perry parroted it. If the tax law allows this behavior should we be demonizing those who use these tools?

Trying to communicate the evil of over-leveraging may be too complex for an election. Republicans need to be focusing on jobs when we all know that there are millions who have dropped out of the labor market. And we need to be focusing on downsizing government when we know that our government has become so large it is threatening.