Welcome to DU!
The truly grassroots left-of-center political community where regular people, not algorithms, drive the discussions and set the standards.
Join the community:
Create a free account
Support DU (and get rid of ads!):
Become a Star Member
Latest Breaking News
General Discussion
The DU Lounge
All Forums
Issue Forums
Culture Forums
Alliance Forums
Region Forums
Support Forums
Help & Search
General Discussion
Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsHow Uncle Sam Helped Mitt Romney Build His Fortune
...or, "How I made millions and millions and millions by gaming the system (corporate debt interest tax deduction edition)".
Via Crooks and Liars
http://crooksandliars.com/jon-perr/how-uncle-sam-helped-romney-build-his-fortune
Private equity owes its success in no small part to that uniquely American provision of the corporate tax code. The New York Times recently helped explain why:
And not just a little cheaper. As the Treasury Department recently explained, "The effective corporate marginal tax rate on new equity-financed investment in equipment is 37 percent in the United States. At the same time, the effective marginal tax rate on the same investment made with debt financing is minus 60 percent--a gap of 97 percentage points." The result:
Or, for the likes of Mitt Romney, a business model.
For the leveraged buyout (LBO) kings of the 1970's and 1980's, that was the pot of the gold at the end of the rainbow. Because the same interest deduction applied whether debt was taken on for a new factory or just to pay investors, Josh Kosman detailed in The Buyout of America, the early corporate raiders and their private equity successors could almost mint money as they bought firms for a fraction of the overall deal size:
Companies can finance investment from either debt or equity. Companies can finance investment from either debt or equity. But profit on an investment financed with equity -- stock issued by the company -- is taxed. In contrast, if the project is financed with debt, then only the profit after interest payments are made is taxed. This means debt-financed investments are cheaper than equity.
And not just a little cheaper. As the Treasury Department recently explained, "The effective corporate marginal tax rate on new equity-financed investment in equipment is 37 percent in the United States. At the same time, the effective marginal tax rate on the same investment made with debt financing is minus 60 percent--a gap of 97 percentage points." The result:
This creates a bias by corporations toward debt.
Or, for the likes of Mitt Romney, a business model.
For the leveraged buyout (LBO) kings of the 1970's and 1980's, that was the pot of the gold at the end of the rainbow. Because the same interest deduction applied whether debt was taken on for a new factory or just to pay investors, Josh Kosman detailed in The Buyout of America, the early corporate raiders and their private equity successors could almost mint money as they bought firms for a fraction of the overall deal size:
Kohlberg saw a way to make debt far less onerous for the company being acquired. He would have the company treat its debt the way businesses handle capital expenditures--as operating expenses deduced from profits through the depreciation tax schedules, thereby greatly reducing taxes. With far less to pay the government, his companies could use the money that formerly went to Uncle Sam to retire these huge loans at an unusually fast rate. Bear's equity would rise with every dollar the companies paid back in debt, even if the value of the businesses only remained the same. The final step in the plan was to sell these companies, usually within four to six years.
This isn't just about Mitt. Everything I've read about this sort of financial wheeling and dealing notes that much of it wouldn't have made financial sense without obscure provisions like this. And it's not as if this problem was unrecognized: once upon a time ordinary could deduct for credit card debt. Once everyone started getting cards and people discovered that by maxing out their cards they could cut their taxes, that was ended. Not so for other (corporate) forms of the same rule-exploitation.
This isn't about "punishing success", and never was. It's about re-aligning incentives with desired outcomes.
InfoView thread info, including edit history
TrashPut this thread in your Trash Can (My DU » Trash Can)
BookmarkAdd this thread to your Bookmarks (My DU » Bookmarks)
4 replies, 1815 views
ShareGet links to this post and/or share on social media
AlertAlert this post for a rule violation
PowersThere are no powers you can use on this post
EditCannot edit other people's posts
ReplyReply to this post
EditCannot edit other people's posts
Rec (9)
ReplyReply to this post
4 replies
= new reply since forum marked as read
Highlight:
NoneDon't highlight anything
5 newestHighlight 5 most recent replies
How Uncle Sam Helped Mitt Romney Build His Fortune (Original Post)
JHB
Jul 2012
OP
myrna minx
(22,772 posts)1. Kick - I think this is interesting.
vinny9698
(1,016 posts)2. Where is the Donald on this topic?
No Donald BS on this. Why? His dad made his fortune on the GI Bill's no down payment program. During WWII.
UTUSN
(70,680 posts)3. R#2 & K n/t