Quick Thought on Unemployment Benefits

All of us have our pet peeves, and one of mine is the “carried interest” loophole, which lets those who get their income from venture capital, private equity, hedge funds, and real estate limited partnerships pay their taxes at capital gains rates (20%) rather than ordinary income rates (39.6%).

With about 1.3 million people (plus the people who depend on them) losing their unemployment benefits as of today, I went back to check what carried interest costs the Treasury, to see if it would have covered extending those benefits for three months.

Carried interest costs the government between $11 and 13 billion a year*, while the unemployment benefits would have cost $6 billion.

So score one for the caviar and Champagne crowd, and nothing for the Ramen noodle and tap water crowd.

See “A Costly and Unjust Perk for Financiers,” Lynn Forester de Rothschild, NYT, February 24, 2013

Mitt Is LBO, Not VC, and Why It Matters

Mitt keeps trying to portray himself as a venture capital guy, but we need to remember that he was a leveraged buyout guy and the difference between them when it comes to job creation.

From “Mitt Romney:  The Man Without a Past,” Michael Hirsh, The Atlantic:

“Mitt Romney has an identity problem.  He is running for president by making promises about America’s future, but as a man who is largely without a past.  Not only has Romney renounced many of his previous positions — on abortion, immigration, gun control, climate change, and the individual mandate he once championed as Massachusetts governor.  He also refuses to divulge many details about what even he has said is his main qualification for the White House in a faltering economy:  his successful career in ‘private equity’ from 1984 to 1999 (or thereabouts).

“What is it about the private equity world that Romney doesn’t appear eager to bring up? … The term ‘private equity’ sounds respectable, but it is a euphemism for the old leveraged buyout deals we remember from the 1980s, the era of corporate raiders like T. Boone Pickens and Henry Kravis.  After junk-bond king Michael Milken, who funded a lot of those takeovers [and whom Mitt worked with], went to jail, the industry decided to rename itself in order to remove the taint.

This is Mitt Romney’s true world.  As the founder of Bain Capital, Romney became a brilliant LBO buccaneer who specialized in buying up firms by taking on a lot of debt, using the target firm as collateral, and then trying to make the firm profitable — often by breaking up or slashing jobs — to the point where Bain and its investors could load up the firm with even more debt, which Bain would then use to pay itself off.  That would ensure a profit for Bain investors whether or not the companies themselves succeeded in the long run. 

But job creation is irrelevant to Bain’s business model, which is all about paying back investors.  Nor does the long-term fate of the companies that private-equity firms buy up matter crucially to Bain’s bottom line (though of course success is better).  The only real risk for Bain is that these companies fail to make enough initial profit in order to permit Bain to pile on more debt and extract a payout, so that it can make back its investment quickly.”  Emphasis added.

If people understand what Mitt did, and they want to vote for him anyway, that’s fine.  I just hate to think of all the people who will vote for him without really getting the Bain business model and the source of Mitt’s extraordinary wealth.

The Two Bains

It is essential that the Obama campaign not let Mitt present his career as “venture capital,” as starting businesses, some of which of course fail.  Mitt’s specialty was destroying existing businesses, for fun and profit.  He didn’t inject capital nearly as much as he loaded up debt — crushing, unsustainable debt the companies couldn’t survive.

From “Bain is just chapter one in the Book of Romney,” Robert Schrum, The Week:

“More likely, Romney will trot out workers — say, from Staples — to highlight jobs he claims to have created. The problem here is that during his tenure, Bain had two businesses. One was venture capital investing in startups. The other, which Romney drove, consisted of buying out a firm, hollowing it out, loading it up with debt, cutting wages — and making millions before the firm went bellyup. The one endeavor doesn’t redeem the other: What’s at issue here is not an accounting question, some mere matter of addition and subtraction, but the crass calculation of pillaging jobs and oppressing workers as a conscious business plan while occasionally grabbing a government bailout along the way.”  Emphasis added.

I Hope Mitt’s 15% Tax Rate Will Get the Country’s Attention

Mitt Romney has been reluctant to release his tax records (and didn’t when he ran for senator, governor, or for president in 2008) because he knew people would be outraged that, as a Bain venture capital guy, he pays a rate of 15%, rather than ordinary income rates.  Of all the loopholes and funny business in our tax code, this is one of the worst, if not the worst.

While not releasing his tax returns, Mitt has now acknowledged that they show he pays 15%.

I am guessing that most of the country isn’t aware of this “carried interest” rule that lets him pay such a low rate, and although there have been efforts in Congress to change it, it’s never been an issue that’s lit up the switchboards.  I’m hoping that publicity about Mitt’s unfair tax advantage (and everyone else in venture capital, private equity, etc.) will finally generate enough anger to get the law changed.

By the way, Chuck Schumer, the Democratic senator from New York, and self-proclaimed champion of the little guy, has been one of the main forces in Congress blocking a fix for the 15% rule.  That’s because he gets tons of money from Wall Street, and he protects their unfair tax break in exchange.

I don’t want to “redistribute” Mitt’s wealth, I just want him to pay the 35% that I do.