(Working) In These Times: Big Business Lobbies to Save Tax Breaks Spurring Plant Closings

[Omaha Steve]

http://www.inthesetimes.com/working/entry/4631/big_business_lobbies_to_save_tax_breaks_spurring_plant_closings_recession/

Monday July 20 7:17 pm

Even as the union representing Stella D’Oro factory workers in New York City is fighting the private equity firm that wants to shut it down, lobbyists for equity firms and other big investors are swarming over Congress to keep the tax breaks that helped fuel such buyout-driven closings. Related tax breaks also helped spur the global meltdown resulting, in part, from taking on too much debt to pay for shady investment instruments such as credit-default swaps.

As a result of these tax breaks, the Service Employees International Union (SEIU), among other reform groups, has urged Congress to “close tax loopholes that encourage buyout kings like KKR’s Henry Kravis and Carlyle’s David Rubenstein to utilize risky debt-laden business models to earn hundreds of millions a year while allowing them to pay a lower tax rate on their huge investment incomes than nurses have to pay on a $50,000 salary.”

SEIU estimated—based on public figures—that Henry Kravis’ creative use of tax loopholes cost taxpayers as much as $96 million in 2006, when private-equity funds were raking in investments to take over companies, then forcing them to pay off the loans the take-over titans used to purchase the companies.

Essentially, the tax system rewards companies and executives that pile up enormous amounts of debt either to use “leveraged buyouts” to take over other companies before reselling them, or to speculate in such near-worthless investments as subprime-based “mortgage-backed securities.”

Then, critics say, the executives line their pockets by paying as little as 15 percent in capital gains taxes on their income when they resell companies bought with other people’s money, rather than the higher 38 percent they’d normally owe on income.

Last year, Bob Greenwald’s Brave New Films produced an animated cartoon, “Larry the Loophole,” explaining how this lowered capital gains tax windfall fits into private equity funds’ schemes to take over companies:

This low taxation rate on resale profits is formally known as “carried interest,” derived from a long-ago era when, as financial blogger Dana Chasin observes, “private fund managers customarily did take equity positions in the funds they managed. Such positions were referred to as a “carried interest,” – an interest they held as long-term (carried) investors.”

FULL story and video at link.