Romney Wants to Lower Taxes on PEU's

Republican Presidential hopeful Mitt Romney called for lowering taxes further while cutting government spending. The ex-founder of private equity underwriter, Bain Capital knows the power of tax incentives. Lower capital gains taxes, 15% vs. 20% under the Bush administration, feuled rapid growth in the private equity sector.

Just yesterday Romney's old firm, Bain Capital joined with The Carlyle Group and another PEU to buy Home Depot's Wholesale Supply Division for over $10 billion. Between Bain and Carlyle whose corporate offices are just down Pennsylvania Avenue from the White House, the two firms manage over $100 billion in assets.

However, PEU's preferred capital gains tax rates are the subject of political queries in both the U.S. and Britain. The UK taxes their PEU's at only 10% capital gains rate, something envied by America's private equity community. Not long ago ex. IRS Chief Charles Rossitti, now of The Carlyle Group, testified to Congress that an 8% capital gains tax rate would be good for the economy. That would mean my local sales tax would be the same tax rate as huge PEU's. Something stinks.

Beware that flaming paper bag of "lower taxes" Mitt Romney just threw on your porch through your television.

Private Equity Fees vs. Capital Gains Taxes

While private equity leaders implore the government to further reduce capital gains taxes to somewhere around 8%, they take 20% of the profits from their efforts giving the other 80% to investors. Twenty percent used to be the federal capital gains rate but the Bush administration reduced it to 15% thus "stimulating the economy".

Wouldn't private equity underwriters (PEU's) reducing their take do the same thing, put more money in the pockets of investors to spend? They have their annual 1 to 3% of total funds managed as a safety net. Think of how much more the economy would be stimulated with PEU's taking the same rate as the federal capital gains tax?

I propose Congress enact legislation that would tie investment firms charges to the capital gains tax rate. If it drops to 8% then so does Carlyle's profit sharing percentage. If the aim is to stimulate the economy then all organizations should do their part...

Carlyle Flips Another Government Services Company for Big $

The Carlyle Group announced the sale of U.S. Investigations Service Inc. to another private equity group for $1.5 billion. Providence Equity Partners is acquiring the leading provider of pre-employment screening solutions, the largest provider of security investigations for the federal government, and a global supplier of cleared personnel supporting critical federal programs. Welsh, Carson, Anderson and Stowe also owns a big chunk of USIS and will benefit mightily from the sale.

Did you know USIS used to be a government agency, the office of Federal Investigations? In a similar move to student loan vendor Sallie Mae, privatization turned it into a corporation in the 1996.

So how much did the boys from WCAS and Carlyle make on the deal? In January 2003 WCAS paid $545 million for the company, already partly owned by Carlyle since 1999. Carlyle reinvested $172 million in the transaction. The deal turned many ex-government employees into millionaires.

In four years USIS at least doubled, possibly nearly tripling in value to $1.5 billion. For conservativism I'll call the 2003 buyout at $717 million, the total investment of both WCAS and Carlyle. The private equity underwriters, PEU's made $787 million on their four year investment, nearly $200 million a year. In a move reminiscent of the Gipper, USIS gave 110% return to its investors.

How much will the sellers save in capital gains taxes as their assets were held for more than one year? WCAS and Carlyle save nearly $40 million from this transaction alone. Next time you hear Republicans or Democrats talk about the magic of privatization recall USIS and Sallie Mae.

Individuals, especially rich board members with significant stock holdings make out like bandits from what used to be a government services organization. Then after making millions, they don't share with their original benefactor! Sallie Mae's board members will save nearly $50 million with the Bush tax giveaway.

How much will the President's friend Tom Scully (ex-Medicare chief) make off this deal as a General Partner for Welsh, Carson, Anderson and Stowe? Will he voluntarily pay extra taxes as Tom is intimately aware of Republican efforts to throw people off Medicaid via increased cost sharing and proof of citizenship requirements? I'm not holding my breath.

Next time you hear your Congress person cite the need to throw people off Medicaid, nutrition assistance, or housing help, remember who can more than afford healthcare, a decent meal and fine accomodations. Then vote them out of office.