The Carried Interest Loophole

Every so often, the carried interest loophole pops back into the news. This is the quirk in the tax laws that allows private equity managers to be taxed at the capital gains rate on the bulk of their compensation. Dems talk about changing that, but nothing happens. There are more ways that private equity takes advantage of the system to create enormous wealth for the few while destroying wealth for the many.

In theory, private equity should perform a useful service in the economy. A private equity firm would take over an underperforming company, use their expertise to turn the company around, and restore a better performing company to the marketplace, preserving jobs and earning a,good return on their investment.

In reality, a private equity firm buys an underperforming company through a leveraged buyout, which means the company is immediately loaded with debt. They may take the company into bankruptcy, to rid themselves of union contracts and pension obligations. If the pension fund was overfunded, they raid that first. They also borrow more money to pay back the investors. Debt also provides tax breaks. They reopen the company with no unions, fewer workers, offshoring where convenient, pension obligations minimal, then sell the company or take it public, if they’re successful for a large multiple of their original purchase price. The carried interest comes from 20% of this sale.

The workers lose, private equity gets insanely rich. You might argue the workers were on their way to losing anyway, but that doesn’t make what private equity does right.

The NYTImes has a long article laying out how this all went down with the maker of the Twinkie.

Author: sherrinichols

I got things to say!

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