Private Equity Funds Are Good for the Economy but Should Pay More Taxes

Mitt Romney and Bain Capital have been attacked by the opposition as greedy rich folks that destroy the economy and the lives of average Americans. However, more than 90 percent of the capital invested in private equity funds like Bain is actually supplied by huge institutions such as public and private pensions whose pensioners typically receive 80 percent of fund profits.

To earn those profits, private equity funds target and acquire dysfunctional companies, add capital, inject management know-how and then recycle prosperous businesses to the economy. Most acquisitions are not hostile or forced by acquirers and target companies often recognize that their survival may hinge upon the acquirer’s capital and management talent. Many recycled companies are transformed into profitable and productive employers for the economy.

The owners of successful private equity funds make superhuman returns and tons of money because they buy good businesses cheaply from distressed sellers motivated to save their companies, leverage their tiny equity positions with huge amounts of debt and other investor equity and further enhance returns by recycling target companies to profitability quickly.

Whether private equity funds are moral or fair is for philosophers to decide. However, those activities are legal and they are as moral or as fair as anyone seeking to buy a home in this distressed real estate market by seeking out a short sale from a motivated seller eager to shed the weight of an upside down mortgage; or as fair as buying a home needy of repair or improvement with an eye toward flipping it quickly for a tidy profit; or as moral as a buyer taking on a mortgage as large and as cheaply as possible. Isn’t that essentially what private equity funds do with businesses?

Private equity funds should not be vilified for what they do. However, they should pay higher taxes. Not because they are rich, but because the capital gains tax they pay for most of their income does not derive from their capital gains. Preferential tax treatment for capital gains was enacted because of the realization that for most investors the capital they invest has already been taxed to them previously as wage or other ordinary income and because they need some additional incentive to take the risk of losing their money in investments. As indicated herein, 90 percent of private equity fund capital comes from third party investors who bear the risk of any investment losses, so most of the income earned by private equity fund owners is really contingent fee income for a job well done, and that should be taxed as ordinary income.

Citizen Romney Must Take Charge of the Presidential Debates

Mitt Romney needs to accomplish three objectives at this Wednesday’s debate with President Obama. First, he needs to show that he can relate to average Americans, and that he is indeed one of us, with the same concerns, doubts and fears about the future of our country. Second, he needs to induce the President to answer questions about his economic policies and take responsibility for his numerous failures during his first term. Third, he needs to accomplish one and two by neutralizing the debate moderators that are, for the most part, egregiously biased in favor of the President, and likely to lob him creampuff questions and/or accept answers filled with rhetoric and pabulum.

Mr. Romney can accomplish all three objectives by not merely being presidential candidate Romney, but also Citizen Romney. Americans need to see him as a concerned citizen first, and a political candidate second. Romney needs to refocus the President’s narrative to answer the tough questions about the economy and get the answers we as Americans need to make an informed decision on Election Day. Candidate Romney must then layout his economic plan and vehemently and specifically contrast how the American economy and how middle class Americans will benefit from the new economic policies of a Romney administration. Americans are frustrated with the lack of serious media coverage of the shortcomings of this administration or its Republican challenger’s ideas for improving our situation, and Mitt Romney will be performing a great service to us and our political system by cutting through the president’s rhetoric and the mainstream media bias against him by engaging the President in a serious substantive debate about the economy and our future.

Mr. Romney needs to channel a bit of Newt Gingrich, when Mr. Gingrich challenged debate moderators and highlighted the liberal media biases during the Republican primaries debates, and a bit of Jorge Ramos and Maria Salinas, Univision TV anchors during a recent interview, when they relentlessly demanded that the President answer tough questions about immigration. A bit of respectful pushback against the media and the president will go along way to shedding some desperately needed light and balance on what has thus far been a dangerously one-sided narrative in favor of the president.

Without compromising too much of an otherwise even-keeled demeanor, Mitt Romney needs to approach this first debate with extreme urgency, not only because his political career may hinge upon it, but because the fate of our country and indeed the free world may also depend upon it. If Mr. Romney follows this prescription, and repeats it in subsequent debates later this month, he will succeed in winning the hearts and minds of undecided American voters.