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The Loopholes That Fuel Private Equity Buyouts


The Loopholes That Fuel Private Equity Buyouts


As a result of a series of attacks and counter-attacks on Republican presidential candidate Mitt Romney’s work with Bain, there’s been a lot of discussion about private equity, buyouts of firms, and their ultimate relation to the economy. So far the discussion has been a back-and-forth on layoffs and “creative destruction,” with very little on how laws and regulations structure the way private equity and buyouts happen in this country.

I interviewed Josh Kosman, author of The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy, on this topic. Bob Kuttner reviewed his book in May 2010, and Kosman was on Up with Chris Hayes last weekend. The interview has been edited for length.

Mike Konczal: What are private equity funds, and what do they do?

Josh Kosman: Private equity firms are mostly former Wall Street bankers who raise money to buy companies on credit. They used to be called leveraged buyout (LBO) firms, and when the first leveraged buyout boom went bust in the 1980s they regrouped and called themselves private equity.

The big difference between them and venture capitalist or hedge funds is that the companies that they buy borrow money to finance the acquisitions.

Private equity firms own more than 3,000 U.S. companies and employ roughly one out of every 10 Americans in the private workforce. This is just America, so it doesn’t include companies or employees overseas. Some companies include HCA, the largest hospital chain, to Clear Channel, the largest radio station operator, to Dunkin’ Donuts. They are in every industry.


  1. albob January 14, 2012

    The public be taken for a ride.

  2. ewentprises January 14, 2012

    Since tax loopholes only apply to those with certain standards of eligibility, i.e., wealth or corporate status, Mitt Romney is yet another in a long line of Republican CEOs with their eyes always on the presidency. We don’t elect CEOs. We elect a president who represents ALL of the people in this country, not just the 1% or Corporate America.

    An example of Romney’s wealth exclusivity is his comment on NBC’s Today show recently where he makes the claim that the public criticism of the recklessness of Wall Street and the nation’s vast income disparities are a product of “envy”. That comment is one every American on Main Street needs to remember when they vote for the presidency.

    There is more than enough evidence to show that Republicans as a party do more to protect wealth of the richest Americans. In no way does this contribute to the American goals of broad public benefit. Their wealth does not create jobs in the US. This is why Republicans are now the Wealth Protection Cartel ready to jump at any opportunity “to keep the 1% at the top” as Rep. Ryan stated publicly.

    What more proof of Republican wealth protection is needed than their mechanism for holding up funding for the 8 million Bush unemployed until 2008 unless a tax credit that only benefitted the wealthy was part of the deal? Or the FEMA funding held up until funding for alternative energy was removed?

    Who then do Republicans really represent? The wealthy who feed their campaign coffers? Or the people they are elected to represent. 1% of the population are not the sum total of the population.

  3. Common Sense Patriot January 14, 2012

    This is just one example of the numerous loopholes in the massive federal tax code – which is so complex that even the Congressmen who write it don’t know it’s actual size. A dozen different members of the House and Senate give various numbers of pages ranging from 2,500 pages to 2,500,000 pages!!! The U. S. Government Printing Office says it’s 13,458 pages in total but it is unclear as to wheher that is the IRS code, or if it also includes the 3,387 pages in Title 26 of the U. S. Code, which is the part written by Congress, which would give it a total of 16,845 pages. Part of theproblem in getting an exact number is that old provisions expire and new provisions are added each year, along with the IRS rules to explain them. An online article from U.S. News and World Report in April, 2010 stimated 70,000 pages. Even at the lower figure, the size is massive! What is clear is that the political class has continuously used the tax system to reward both constituents and reelection campaign donors and tried to manage social and political changes by manipulating the tax code to advantage those changes. As a result, we have ended up with a tax system that is anything but fair, easy to understand, efficient, and easy to comply with. A lot of it has to do with how many tax lawyers, accountants (including CPAs) a company or person is willing t hire to help them file a tax return. The actual taxes vary widely because of the different loopholes the tax lawyers and CPAs find and claim. The top U.S. corporate tax rate is 35%, but that rate is applied haphazardly and grossly unfairly against different companies and different industries. In 2010, Proctor and Gamble paid an effective tax rate of 17.9%. Walmart had an effective tax rate of 33.6%. General Electric had an effective U.S. tax rate of 3.6% even though it had billions in revenue. This illustrates how some companies have loopholes and others do not. The latest General Federal tax filing, if it had been printed out rather than submitted electronically, would have been about 57,000 pages in length. Think how much work GE (tax lawyers, accountants, CPAs, etc.) put into compiling a 57,000 page tax return – but it reduced their taxes significantly, well worth the money. Now think about how many people and how many hours it will take the IRS to go through a 57,000 page tax return – and this is just one company. No wonder the IRS claims to needs more money to do it’s job. Now think of of all the U. S. taxpayers who have to go through this system. Who benefits? Rich people with the money to hire tax lawyers and CPAs to take advantage of the loopholes. We need a tax code that has aonly a few brackets for individuals with no deductions of any kind. If you choose to have more children or give to charity or buy a home, that’s your business, but don’t let the politicians try to manipulate your choices with the tax code, nor reward or punish behavior with the tax code. Likewise, the corporate tax rate should be lowered to one more in line with European companies, but all deductions and loopholes should be eliminated. The whole tax code could be on a couple of pages!! But to get there, you have to remove those who have a vested interest in keeping the code the way it is – the politicians and bureaucrats in Washington. Many members of Congress and their staffers become lobbyists after serving long enough to know the players, the system, and to build up influence. They corrupt the system, lobbying members of Congress to add these tax loopholes for their clients. To get to a fair and simple tax code, the first step has to be installing term limits into our political processes. Our current set of politicians, in both parties, are not interested in simplifying the tax code. If they did, they would lose a primary source of political and financial power. They need to be replaced and the only way to do that is via a Constitutional amendment that imposes a 6 year maximum term limit on all federal politicians, and includes a provision that they can not work as lobbyists for at least 5 years after leaving office. Likewise, there should be laws that prohibit them from taking jobs for companies that benefit from any legislation they sponsored while in office. And earmarks should be eliminated entirely. These all have to be codified ina constitutional amendment. Otherwise, the politicians just find ways around it, just as they have the existing rules they passed. It is any wonder that the majority of members of Congress are millionaires? They get rich off this system while the average working American gets the shaft.

  4. hgltraveling January 14, 2012

    Until those who are amongst the “other 99%” but who rely on “PULPIT POLITICS” to do their thinking for them, stop and start thinking for themselves, this country is doomed. We have bred a ‘middle earth’ mid-country mass of religious conservatives who don’t believe in birth control and irresponsibly procreate [they can’t really afford to raise all those kids] and then abdicate their responsibility to think for themselves and vote along the party lines urged from their “pulpits” and wonder why this country is going to hell.
    WAKE UP MIDDLE AMERICA! The only one’s who can afford the kind of lawyers and accountants who are geared up to find and exploit and tweak every tax loophole, are the other 1% who control most of the $$$ and they, have been undermining our economy for decades for their own self-interest. But middle America always votes republic, regardless of the obvious consequences to them, and why??? Because the “bible” tells them to? It is time for our US Supreme Court to yank the non-profit status of religious institutions that preach political strategy.
    WAKE UP! America, and use your collective noodle!

  5. valszy January 14, 2012

    The framers of the Constitution listed six reasons for doing so in the preamble, the fifth being “promote the general Welfare”, which to me sounds far more of a leaning toward socialism than capitalism. Remember our Revolution and Constitution sprang from the enlightenment, not from Judeo-Christian philosophy, and no place in the Constitution is capitalism mentioned.

  6. mll January 15, 2012

    Anyone noticed Romney’s recent comments about the Occupy movement and being a 1%er.
    He says it is all about class envy, and nothing is wrong with the rich getting richer, and everyone else going the opposite direction, or just keeping a float. He, like most Republicans thinks nothing of the poor or middle class, and these are the fools that keep supporting the 1%ers!

  7. dpaano January 16, 2012

    I have to agree with the first two posters….we need BIG changes in our government and our tax code in order for things to progress. As long as we have the same people running the Congress and the House, we’ll NEVER have any changes made. I have to blame BOTH parties for the way things are now…and I don’t know how we can turn it around because, as you said, most U.S. Citizens do NOT know who they are voting for and just vote what they are told. If they REALLY took the time to research the candidates, they might be surprised that they are all idiots!! I guess that’s why the Republicans want to keep American stupid….then we’ll just do what they say and believe every word they put out as gospel without actually doing any thinking!! It’s a sorry state of affairs, and it saddens me to see what this country has become within the last 20 years.

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