There is an irony here: one of the criticisms of Mitt Romney’s record at Bain Capital is that private equity firms put unhealthy amounts of leverage on the firms they acquire in order to exploit the favorable tax treatment of debt. The Buffett Rule would make that strategy even more attractive.
That is from Josh Barro, there is commentary from Reihan here, and the original Barro post is here.
Isn’t there any irony that the guy who wants to cut the national debt, used private debt yo make his money? (Not as ironic, but still I just made the jump)
Nope.
I’m not personally obligated to make those private debts good, I am personally obligated to make those public debts good. So, no the two aren’t comparable and there is no irony.
How would increased personal taxes on capital gains effect a corporate entity taking on debt?
You’d want the same distribution whether capital or income to pe partners then. Corporate debt load irrelevant
In a model of optimal capital sources, debt would be given higher weight if corporate tax rates are higher and the expected required rate of return on equity would increase if capital gains taxes increase, giving it a lower optimal weight.
you want to minimize cost of capital, summarized by:
W(d)*r(d)*(1-t) + w(e)*r(e)
Again, as far as I can tell, the post is about personal rates. Not corporate rates
“and the expected required rate of return on equity would increase if capital gains taxes increase, giving it a lower optimal weight”
A higher capital gains tax reduces the value to shareholders, and hence raises the cost of capital. A higher cost of capital either means a higher D-E ratio or lower net income.
Higher corporate tax rates would lower net income, reducing corporate value, raising the cost of capital, and resulting in a higher D-E ratio.
Same impact whether it’s a tax on capital gains, dividends, or EBT.
This should be a good issue for Obama I’d think. If a company wants to pay 10 million in dividends to Romney he pays 15%, but if they wanted to pay out $1000 bonuses to 10,000 workers they would all pay their marginal rates. Romney can’t really claim the low tax rate sparked the investments since they were all made under Clinton era rates at 28 or 20%. Common sensical enough not to fall into the jealousy / class warfare nonsense. Even better if Obama is telling this to midwest auto workers Romney thinks work for Zombie companies that should die.
The higher rates wouldn’t make all investment dry up. If rates were higher, the assets would have had a higher required pre-tax return, so Romney could have still made a decent return, because capital was chasing other investments with higher returns or was going to consumption, so there was less competition for the profits he could realize from the firms. Less capital would have been going into these productive areas, making the price of the investments lower.
This effect is clear now regarding the tax on foreign profits of US corporations. There are piles of cash in foreign accounts there for all to see because if those firms want to invest in American assets, they have to pay an unusual tax. So, instead, they keep it oversees and invest in foreign assets. This isn’t just theory. We can see the capital being kept overseas because of the tax. But, of course, there is still investment in the US. There is still some threshold where capital will be invested. Just as with the capital gains tax.
Romney Bites the Government Hand that Has Fed His Fortune
http://dirtdiggersdigest.org/archives/2702
Romney’s record at Bain shows him taking state and local economic development subsidies; e.g., their Steel Dynamics got a $77 million subsidy package, including grants, property tax abatements, tax credits, and reimbursement.
After leaving Bain, Romney still shares in its profits:
* Alliance Laundry Systems received $1.25 million in assistance from Wisconsin.
* Stream International got $4 million in grants and tax breaks.
* Staples got a $4.2 million subsidy package from Maryland.
* Burger King received a $9 million subsidy package to stay in Miami.
* Quintiles Transnational had a $25 million subsidy package from North Carolina.
* AMC Entertainment got more than $40 million in subsidies from Kansas.
While Romney spouts free-market rhetoric, his ascent — and that of the rest of the 1% — has been propelled by public money.
“While Romney spouts free-market rhetoric, his ascent — and that of the rest of the 1% — has been propelled by public money.”
Absolutely, a fact conveniently hid away by people like Tyler Cowen
It’s a “fact” that’s only relevant if one is incapable of holding two ideas in their mind at the same time.
Idea No. 1: The current system of public subsidies is awful and should be replaced.
Idea No. 2: If tax benefits are available, I have an obligation to my shareholders to take advantage of those benefits.
From FDR ownward, the left called for an expansion of the federal government far beyond the scope it occupied in the nation’s first hundred years. Now the left is *shocked* *shocked, I tell you* that, having created a leviathan to shovel public money to their pet interests, others have used that leviathan to the same end, but different interests.
Northwestern or Chicago Federalist society?
I don’t believe we should have a mortgage interest deduction, but as long as we do I’m going to claim every dollar of it.
I opposed the energy-efficient appliance tax credit, and I claimed every dollar of it when I made a qualifying purchase.
There’s nothing inconsistent or hypocritical about that. I operate under the tax code that I got, not the one I wish I had.
The statement that the 1% were propelled by public funds is overly broad, and Tyler Cowen hasn’t “conveniently hid” anything of the sort. Generalities are the first refuge of the ignorant.
“I don’t believe we should have a mortgage interest deduction, but as long as we do I’m going to claim every dollar of it.”
+1, that’s my thought also.
Indeed, the current housing tax deduction is ridiculous. It’s bizarre in my mind that someone that actually owns their home get’s no deduction, but somebody that occupies a house that the mortgage company owns gets a large tax break. How exactly is that good for society?
Those subsidies alter the outcome of cost-benefit decisions of private actors that confer pecuniary and external benefits to the communities that provide the subsidies. There are employment, commerce, tax revenue, and spillover effects.
These are state and local fiscal decisions. Unless you live in one of these states or cities, it’s none of your damned business. And if you do, apparently you got outvoted. We call that “democracy.”
If the subsidies didn’t exist, then Bain Capital might have made different decisions such as shutting down the firm and selling off its assets. Then you’d be criticizing them for killing jobs.
It’s a little too early to have Romney Derangement Syndrome.
Just discouraging the rich from working at all. In any case, Barro proposes a solution to the problem Tyler mentions – tax corp. profits before interest deductions. Way to bend it!
Sure is silly of people to use money unless the planets are in alignment.
Not that anyone asked, but I think we should do away with corporate taxes. Better to have 100,000 shareholders trying to lower their taxes and individual dividend checks than one giant company that can use economy of scale to hire an army of lawyers and accountants.
“one giant company that can use economy of scale to hire an army of lawyers and accountants.”
Reference General Electric:
“For those unaccustomed to the loopholes and shelters of the corporate tax code, GE’s success at avoiding taxes is nothing short of extraordinary. The company, led by Immelt, earned $14.2 billion in profits in 2010, but it paid not a penny in taxes because the bulk of those profits, some $9 billion, were offshore. In fact, GE got a $3.2 billion tax benefit. ”
http://abcnews.go.com/Politics/general-electric-paid-federal-taxes-2010/story?id=13224558#.TybCrfmmVoE
If the US eliminated corporate taxes, the government would collect more money from GE’s profit’s than it currently does and GE wouldn’t have as large an incentive to invest in foreign manufacturing as it currently does.
I like the assumptions people make when they engage in the discussion of capital gains rates and double taxation of income.
We’re it that simple.
First, the argument does not hold with repect to capital gains on most foreign stock–they never paid US corporate income taxes.
Second, many US corps no or very low taxes. When the original Bush cap gains proposal came out, it provided that the amount the corp paid in taxes would determine the rate that you would pay on dividends. Guess what. They found that many corps paid no or low taxes and the rate would go up.
First point applies to dividend distributions of foreign corp income as well.
Ironically, you could argue that from a tax incidence point of view that if we raised effective corp rates, and US stock were held by foreigners, we would be shifting the incidence os US taxes to foreign stockholders.
I love how the first blogger I have seen that understands irony is an economist and not someone in the humanities or a professional writer.
This shows that corporate tax policy is broken, not that private equity induced leverage is good.
Indeed, one of the reasons for private equity leverage is that it is responding to tax incentives that publicly held companies can’t or won’t heed.