1. Almost no one seriously makes the argument that taxing capital gains is "double taxation." The "double tax" argument applies to dividends paid from profits that have already been taxed. The profit from selling a capital asset has not been previously taxed, so it makes no sense to talk about double taxation. There is only one instance where you can make the double tax argument for profit from selling a capital asset: When you realize gain from the sale of a corporate stock, where the gain is due to an increase in the price of the stock due to retained earnings which have already been taxed. Even this seems a little dubious to me, but it is included as an argument in my Federal Income Tax Law textbook.
2. The standard argument for a particular rate of tax of capital gains concerns the effect the rate would have on allocation of capital, and secondarily revenue collection. A tax on capital gains that is too high might discourage selling the stock of a poorly performing company to reinvest the proceeds in a venture that could better use the money. Obviously, if the tax is too high and has this effect, the government will collect less revenue. None of this has to do with double taxation. It is worth noting, too, that the 15% capital gains tax is for "long term" (i.e. more than a year) capital gains. This policy thus grants favorable treatment to cap. assets held longer than a year, compared to assets held for a shorter period. Also, the tax can be lower if the individual is in a lower tax bracket. (Important for people who may only have a little invested and otherwise have a small income.)
3. Dividends are not capital gains, but are now taxed at the same rate. This policy is set to expire along with so-called "Bush Tax Cuts." The issue of allocation of capital does not arise in this case,* as it did in 2. *With some minor caveats.
4. Finally, "carried interest" is the term used for certain compensation taken by Private Equity managers. It is treated under current tax law as a capital gain, and thus, taxed at a rate preferential to income tax for anyone in a bracket above 15%. Here there is a logical-legal question about whether private equity managers should be taxed in this way. The compensation that they receive is not equivalent to gain realized when a capital asset sold, that much is clear. The law allows "carried interest" such treatment, but it is an open question as to whether it should, but the answer does not depend on what we think the right tax for capital gains should be.
All of these are distinct points. A person might believe there should be no tax on long term capital gains, but also believe that private equity managers' compensation should be treated as ordinary income; one might think it is unfair to tax dividends but see a capital gains tax as a necessary way to raise revenue and prevent excess speculation,and so forth. Thanks, Pete

got my answer - thanks. (found it on site). Brian's show the following day, interview with Dylan Ratigan, on "Greedy Bastards". Anyone who missed it, its worth going back and listening to it!

May I leave a question? Didn't Brian also interview the former Bloomberg reporter who's now an MSNBC show host on very closely related issue, which fellow has a recent book out? I want to get the book (I have the old one he wrote, on private equity, about a year or two ago). Can't find that show though....

This issue is critical. The segment I'm trying to find was very activist oriented -- fantastic.

A lot of terrific comments here. I hope they get to the right ears.

Thanks, anybody, if you know what author, segment, and book I'm looking for.

Hi, To all the financial predators out there: Give us our money back. The money back from the mortgage fraud/predatory lending situations in my particular case. Enough suffering already!It will take you forever to learn this, but here it goes anyway: without customers, you don't exist. So please respect customers and borrowers (yes, that means me). Respect us even if you do have to think about your investors first. Without our money (borrowers), you can't do anything. You need us. If there is no respect, no transparency (the 100% kind) I am not going to do business with you. That's my bottom line. You want to make money. I do too. I also wanted to keep my home.Eugenia Renskoff

It is ironic that the Republican candidates are piling on about Romney's record at Bain Capital. All the candidates are espousing the very regulations that could prevent predatory practices from ruining companies.

I am tempted to say that "The Ethics of Private Equity Firms" is an oxymoron.

Take for example the record of the Bushs'(and Bakers') Carlyle Group. Carlyle purchased United Defense Industries at a bargain basement price shortly after the collapse of the Soviet Union, thereby giving the family a vested interest, through public policy, of increasing the value of their investment through greater military spending. Their dream came true with the September 11 attacks. Five weeks after 9/11, Carlyle filed its S-1 with the SEC announcing their intention to take United Defense public. President George Bush signed the Defense Authorization Bill on December 2, 2001( which included a 11% increase in Defense spending) and UDI stock was first sold (by Carlyle) on the NYSE on December 3!! Bush family made perhaps a hundred million on the deal.

Included in United Defense's prospectus was the statement that the 9/11 attacks represented a "marketing opportunity" for the stock...

United Defense Technologies was at the time the fifth largest defense contractor with U.S. Gov't. , and manufactured Bradleys and Strykers.

Enough said...

@Joe Ray from Brooklyn:

As a frequent pedestrian on the Brooklyn Bridge Pedestrian Path I couldn't agree more with the observation that "Cyclists should stay off the sidewalk."
However I'm not a big fan of mindless segregation - bike owners should be welcome as long as they 'walk' their bikes. I expect that this year will bring the multi-injury incident that will bring out "boo-hoo-hoo-why-didn't-we-act-sooners", the public service tort lawyers, and Quinn's Council of Embezzlers public hearings.

Do people such as Christopher Dodd, "Duke" Cunningham, and Charles Rangle (to name a few) lose their "public service" designation because of the growth of their wealth while in Congress - or can "public service" actually be seen as a "double entendre" in the same vein as the allegation against Mr Christie in the next segment?

Hi,

A quick note from a cyclist regarding the comment on bicycle lanes on the sidewalk:

Bike lanes should only be at street level, below the curb and, preferably, in their own lane. Designers who put the two on the same level have likely spent little time on a bike. Cyclists should stay off the sidewalk.

Thanks!

Joe

I woke up to Brian's attempt to motivate the the returning OWS "lumpens";
I don't think your guest is capable of the full-throated silliness that you seem to demand of your usual political commentators - too much nuance in his analysis (I'll bet he has some vocational interest in the financial industry. Isn't "Dealbook " part of an up-and-coming Wall Street publishing and financial information conglomerate? No matter.)
[BTW: From is there any truth to the report that there's a new "must wear" t-shirt at Spumoni Square from "12 Things Happy People Do Differently" -
"#3 Avoid over-thinking and social comparison. – Comparing yourself to someone else can be poisonous."http://www.marcandangel.com/2011/08/30/12-things-happy-people-do-differently/

What a disgusting, piece of excrement.
Bain, Willard Mitt Romney's method of getting rich,
was to join a "Private Equity" Group of Thugs, and go around raping
companies, bleeding it dry, throwing the employees on the street and out
of their homes, just to stuff their pockets.

Imagine, what Willard would do as President?
I think, I'll stick with Obama, even with all his human imperfections,
he is fighting for the working class, middle class, as much as the Tea Party/
GOP lets him.

I want to make two points not covered during the show this morning in regard to the private equity issue (or canard as many will consider it):
1. Private equity firms deploy institutional funds collected from private and public pension funds, universities and colleges, private foundations and all manner of NGOs as well as wealthy individuals to achieve high monetary returns on corporate restructurings. Public corporations, like those among the S&P 500, using funds similarly collected, do exactly the same thing through mergers and acquisitions. Layoffs occur but so does job creation. Trying to measure one effect against the other is a fool's errand.
2. Whether the vehicle used for effecting corporate restructurings is a private equity partnership or a public corporation whose shares trade in the public markets, the investor funds being deployed to earn a return come from the same source, as listed above. The managements, at Bain or elsewhere, are doing the bidding of these investors, who should be consulted on whether morale issues are implicated. I am confident the answer would be a resounding NO. It is the role of government to help the displaced and unemployed, not private enterprise. Hoover thought differently and lost an election as a result.

The radio discussion ignores the real issues. The tax that matters for PE firms (and the "carried interest" tax rate for partners is indefensible) is the tax-deductibility of interest payments on debt used to finance the acquisitions (that portion of the tax code was written to incentivize business investment not financial engineering). Without that tax structuring the deals don't work (I believe the estimate is that it produces about 70% of the average return). This also points up the fallacy that PE firms acquire companies that would otherwise fail. They can't b/c they need some stream of steady cash flow to service the debt, even if they need to cut costs quickly to cover the totality later! Given that, idea that they are better managers ("more efficient") is questionable at best. Steve Kaplan of the University of Chicago wrote a study showing that PE returns (net of sponsor's take) from 1980 to 2001 produced returns lower than the S&P 500 index for the same period (see The Buyout of America - Josh Kosman, pg 34). Take away the tax benefits of debt leverage and poof!, the entire business (a paragon of capitalism?) disappears.

Let's first remember that a company is a person and use that analogy.
So, a company (person) is having a loss of profit (heart attack) and a private equity (Dr.) steps up to save them. The first step is to remove many of the people (organs), then removes a few departments (appendage arm or leg..), and if the company (person) survives or dies the private equity (Dr.) gets to charge the government for all his expenses in tax deductions and keep all the money, possessions and future gains that company (patient) has.
And the (people) organs and appendages are thrown in the garbage...
In this analogy, would that Dr. be honored or arrested?

It is very very irresponsible to put all Private Equity firms into the same boat as leveraged buyout PE firms. Private Equity is a very broad label that simply means equity investment capital raised from private institutions like pension funds and individuals as opposed to capital raised by selling shares through the public market. This is the only point at which hundreds of PE firms share definition. Many many firms are not interested in overlevergaing companies or real estate investments and are simply just investing equity into assets to either buyout equity investors that are looking to liquidate their positions or to just give growth capital to companies in order to expand and create more opportunity and more jobs, not less. Private Equity is a very regulated business, especially where pension fund investors, insurance company investors are involved. Mr. Leher and all other journalists and media outlets jumping on this "predatory equity" pile must make these distinctions when reporting on this story.

In 1970 Youngstown Sheet and Tube, then the 4th largest steel producer in the US, built a new state of the art 84" hot strip rolling mill in their Indiana Harbor plant. In the late 70's, when its stock price was low, the Lykes family bought YSTX on credit and began milking it as a cash cow. They stopped long term maintenance,laying off a number of skilled maintenance workers, and only allowed the minimum maintenance to keep production up. They stripped the company at a great profit. When the machines began to fail, they sold the equipment and dissolved the company. That was a crime.

On can argue the ethics of the capitalist system, but to a large extent much of the acrimony towards private equity comes from the apparent tax holiday, lower marginal tax rates, these companies get. It is one thing to be a capitalist. It is a whole different thing not to be taxed for you income.

It is ridiculous to compare Obama and General Motors to Romney and Bain, or in any way to justify raiding the pensions of workers and ultimately using that as a reason to put a company in the bankruptcy that ultimately results in its demise. Fellow listeners lets put on our thinking caps and view this critically. Every brown bag doesn't contain the same thing. Bain's practices of raiding the coffers of companies, especially pensions for workers who have earned them, to expand the wealth of a few CANNOT be justified. It's that kind of thinking, that any profitable end justifies the means is a large part of what has gotten this country into the economic crisis we are experiencing. Even the "robber barons" of old displayed a higher ethical code.

Great show! Lots of good questions that are usually swept under the rug. Here's what I see as the big underlying question: why do capitalists have the right to do whatever they want? Not all private equity firms strip assets -- including retirement funds -- but some certainly do, and it looks like Romney's Bain Capital did so in some cases. Why are they legally allowed to do this?

It certainly looks like "investors" have certain rights that other people (like workers) do not. So much for a level playing field, and corporations as people like any others. And the interests and demands of capital, which carry more weight, change over time. So if capitalists decide they want to double their investments in 3 years instead of 5 or 8, then their behavior changes, and becomes more punitive for workers subject to their demands. Again, why is there no counterbalancing force?

and the rich get richer

@HughSansom: While I completely agree with the idea that there has been a huge transfer of wealth from labor to capital over the last few decades, I disagree with your characterization of Dean Baker's article as "challeng[ing] the demonization of private equity" in the NY Times article you mention. Rather, Baker says that the Times article fails to question the assertion of Romney economic advisor R. Glenn Hubbard that private equity provides a net gain to the economy at large; in fact, that question remains very much unsettled, according to Baker:

"Private equity companies also often force firms into bankruptcy to offload debt. This can often include pension obligations, which are then taken over by the Pension Benefit Guarantee Corporation. Insofar as private equity companies are drawing their profit from this sort of financial engineering, it is not providing a benefit to the economy. In fact, it is a direct drain on the productive economy.

Clearly private equity companies engage in both practices (increasing efficiency and financial engineering). There is no definitive study showing which is more important to its profits and whether the efficiency gains exceeds the waste associated with financial engineering."

To go old-school Marxist on this debate: what Bain does is to exploit labor in favor of capital. Period. Until we decide to start valuing workers more than profits, this sort of thing will continue.

Just reporting on myself. My job location (one company) changed three times in 1986 as people were nuked left-and-right around me. My (new) place of employment in 1988 was nuked by Paul Bilzerian. My fathers company was the subject of a so-reported "rare hostile" takeover the next year. A VP HR told a group of us publicly 15 years later that 'company one' had an unpublished rule to "hire the sons, fire the fathers". Plenty of morality to go around.

I suspect one facet of Republicans attacking Republicans over killing jobs is their investment in the term "job creators" as a rhetorical substitute for "rich." Having not differentiated the rich who create jobs from those who kill them -- all in the interest of hurling the term "class warfare" at the Dems -- they are now being hoisted by their own petard.

In some ways this echos people on the left and right in how they look at capitalism. Like the GOP most Dems support capitalism *done right* and are not communists. It's crony capitalism, corrupt relationships between politicians and business, that upset voters on both sides of the aisle. But having invested so much in labeling Dems as socialists or as un-American for looking to regulation to reign in crony-capitalism ("let the markets regulate themselves!"), they inadvertently paint themselves into the corner of having to defend even the worst aspects of capitalism.

When the parties stop investing in false dichotomies they'll find they have support from the majority of Americans, including some who now pin their hopes on the Tea Party or the OWS movement.

Did the auto companies have any choice to opt out of the federal takeover? The companies Bain took on definitely didn't. And maybe this show could do a follow-up on whether the dealerships & suppliers that shut down or laid off workers are recovering as well as the carmakers themselves have.

Companies come and go over time (A&P anyone?) That should not be the issue here.

The issue is how these type of profits are taxed at a much lower rate than ordinary income, and why Romney refuses to release his tax returns.

Nobody is attacking capitalism or somehow resenting his success---but when the deck is stacked to tax this type of profit-making behavior at a much lower rate than that paid by people who do actual productive work for a living, then there is a problem that needs to be addressed.

"Balance," "jobs destroyed, jobs created," "5 percent vs. 6 percent."

Cab we acknowledge that these are **people** losing these lives? That they are impoverished, their neighborhoods destroyed, their families broken up from inabilities to pay bills? If they want to shut down companies, they should be the first to lobby for a general fund that pays a baseline income for those who lose their livelihoods when these "creative" institutions are destroyed? Fine, destroy these companies--but don't destroy those who have no option but to work in the one place. Give a livable unemployment income that has an indexed raise to those who lose their jobs and just maybe we can tolerate some of the gross inequities.

Why are debt contracts more sacrosanct than labor contracts.

Keep in mind the the group of "finance" folks who move from industry to industry, based on the returns.

1980s/Bankers > Consultants > Hedge Funders > 2007 and on - Private equity. Governed in no small part by regulation and tax laws.

The decadent Schwartzman birthday party two which Lattman refers cost $10 MILLION — ten million for a birthday party.

The argument for not taxing away wealth is that such taxation acts as a disincentive for the activity that generates wealth in capitalist economies. Progressive economists readily concede that there is some kind of disincentive effect in taxing wealth or high income. But the question is whether fairness demands redistribution and whether the benefits of redistribution outweigh the costs.

JT from LI:
You say "As much as people dislike the way Bain made money they have to admit that they didn't break the law." Is this really the ethical level we want in a president?

How the hell much is enough??

Of course, it's immoral. The criteria for a moral structure should ask the question: is this tactic beneficial (to all), is it necessary and does it advance justice? Romney can't answer "yes" to these; if not all, then it is immoral.

Look back at old Kojak shows. What Bain did is similar in method to the old organized crime loan shark takeover & asset stripping that was illegal.

What happens to the people who have their careers invested in a manufacturing or corporate job, and their experience in that job, and then they have to go and take a retail job that was created instead because of all the shift of investment?

Certainly the Obama and the Federal govt. bailed out the auto industry, but as far as I know, Obama and his admin. did not directly make profits on any of the deals. Romney specifically says that he personally, through Bain Capital, created jobs (net-net), with the bottom line goal of creating PERSONAL WEALTH for himself and his investors. That's the equity business, but the way that Romney characterizes himself as a job creating genius because of his business experience is ludicrous and provides little to no benefits to the greater economy.

No doubt Obama will be honing his message to easily turn Romney's pro-job mythology against him.

The comparison between Bain and Obama taking over GM seems specious to me. Bain operates for the profit of themselves and their investors. Obama acted, not for his own profit, but to save an essential American industry.

Just like the housing bubble, these things have been going on in America for a long time. It is hypocritical for us all to make a big deal of this now that it is a presidential election. Were we all okay with this before now?

Aa much as people dislike the way Bain made money they have to admit that they didn't break the law. Do Gingrich and the others want to regulate these firms? If not they should hold them up as an example of success. Afterall, they've been saying that OWS folks are jealous of Wall Street and Cain said that if you aren't rich it's your own fault.

NAFTA and MFN for China - which helped to move manufacturing OUT of the country...Which party Democrat or GOP was more responsible for stripping out the worker parity and environmental protection clauses associated with these trading 'enhancements'? And is the U.S. in a strong enough position to get that manufacturing back? What would it take? Or is the 'race to the bottom' inevitable?

@JoeCorrao: No, they do not put up their own money; they borrow against the company, load the company with unsustainable debt, then take the money and run, leaving everyone else holding the bag.

Why is it profitable to mfg in Germany but not U.S.?

The difference between the federal government taking over a company and Bain, is they did not stuff executive and investor's pockets with money at the expense of pension plans. Everything boils down to money, what happened to community responsibility.

Pres. Obama *bailing out* GM compared to the work of private equity firm is specious; Pres. Obama didn't make a red cent out of that deal. The rapicious profit motive is absent. Mitt Romney took huge profits from all the deals - whether they *worked* or not.

How can you compare the personal economic gain Bain execs/shareholders experienced to the government restructuring the auto industry? Did Obama get rich from that?

This is what happens when a party with no ideology the last 25 years, tries to achieve/retain power.

The intellectual "Bill Buckley" wing of the GOP has stood silent too long, it's time for them to fight back. Newt and Perry should be ashamed of themselves.

Am I the only one thinking about Gordon Gecho? "Greed is good" Just show a clip of the original Wall Street film.

GM was bailed out with public money....Bain was a peivate corp using there own money and risk.

Careful here, private equity (and venture capitalism) theoretically ought to be the best that capitalism has to offer, in that it takes a loaf of bread, and via the alchemy of creativity, hard work and capital turns it to two. When I first got into finance this realm was my goal, no brainer. As I moved closer to that world I quickly saw that the love of money trumps the love of building anything -- and usually the quickest money can be found by taking a loaf of bread and selling the crumbs.

I find financial consulting more rewarding. For example, in the 1990s we promoted "outsourcing" from the US to India and elsewhere. In 2001 Stage 2 was fully planned -- it's what we're seeing now and it's called "insourcing." You can here about it on WNYC and Marketplace this week!

99 percenters should quit this belly button picking about morality and simply demand that tax codes don't benefit all of these activities -- especially at the expense of artists (where's the tax break for buying art!), public transportation, etc.

@JoeCorrao: These predators do not fire people to keep a struggling firm afloat. They buy up companies by taking on huge debt they foist on the company, sell off the best assets, pay themselves enormous fees, and shove the company into bankruptcy after stealing workers' pension funds, then firing them. They also screw the creditors. They create NOTHING.

Reporters have said on more than one occasion that modern Investors recall Gordon Gekko with glee and use him as a hero and role model. Or at least they used to admit that.

and the difference between Bain's role and those "Goodfellas" is that the latter ran a healthy business into the ground on purpose.

The one thing we can say confidently is that there has been a wealth transfer of _some kind_ in the US from labor to capital over the past 30+ years. Since the mid-1970s, the wealthy have gotten wealthier while the middle class and poor have gotten poorer. This is a blunt fact of economic history. There have been a couple of variations in the trend — especially in the boom years of the 1990s — but the trend is clear and _not_ disputed by conservative economists.

Several very well-known economists have argued that the transfer is very severe — Paul Krugman, Joseph Stiglitz, Nouriel Roubini, Simon Johnson, Dean Baker, James K. Galbraith, among others. Both Krugman and Roubini have referred to the bailouts of 2008-09 as one of the greatest transfers of wealth, from labor to capital, in human history.

That said, Dean Baker — considerably to the left of Krugman — challenged the demonization of private equity just yesterday in response to the Times article: http://www.cepr.net/index.php/blogs/beat-the-press/are-private-equity-firms-evil-doers

Another thing is clear from history: The American founders went to great lengths to insulate property, or wealth, from the redistributive inclinations of the broader population. From the 1930s to the early 1970s, there were significant policies of redistribution. Since then, all three branches of the US government have retrenched, consistently further insulating the wealthy from redistributive policy.

How much corp welfare did Bain get from USG?

One lovely tactic private equity companies use? They float bonds in the very name of the company they're buying. That bond is used to finance the sale TO THE PRIVATE EQUITY COMPANY.

The private equity company owns the company, the company owes a massive amount of debt loaned to the private equity company TO FINANCE ITS OWN SALE TO THE PRIVATE EQUITY COMPANY.

Beautiful.

Most of the people whose jobs were saved are not being interviewed in that movie, are they?

When do you eliminate jobs that are no longer needed. One of my first jobs was fixing pay phones. Yet to this day Verizon workers complain about heartless corporate managers wanting to eliminate jobs. Pay phones are not needed even for the poor.

Gingrich's name doesn't appear in the credits, etc., because his team bought the rights to film but had no hand in its creation or production. Supposedly it was produced solely by an anti-Romney Republican consultant.

There are NOT two sides.

My question is: how do the vultures feed when all the prey (workers) are dead.

Capitalism is not intended to be moral or immoral. It's amoral. It represents an arrangement for society which many, including newly minted conservative David Mamet, calls the "tragic view of life."

Romney's firm gets called in by failing companies. Bain's analysis could tell them that there are solutions to rebuild the profit making ability, or that the company must liquidate. That's capitalism. Life cannot exist without microbial predators, and such predators have a useful role in capitalism too.

Let me recommend a new slogan for his campaign: "Romney, the Bain of our existance"

I bet we all worked for companies that had to make tough decisons on laying off people to keep a struggling company going.

Please see this:

http://www.washingtonpost.com/opinions/mitt-romney-and-our-overdue-debate-about-capitalism/2012/01/11/gIQA0EyxrP_story.html

You might want to compare the section in Goodfellas, where the Mob Characters dismantle and sell off the restaurant they take charge of due to a gambling debt... to what a firm like Bain does.
The similarities are uncanny.