Private Equity Firms Don’t Deserve a Tax Cut

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This week, an expose by the Washington Post uncovered a pattern of worsening living conditions in a Pennsylvania nursing-home after its purchase by private equity giant Carlyle Group. Despite being owned by one of the richest private equity firms in the world, the nursing-home struggled financially, leading to elderly residents suffering bedsores, broken bones, infections, and unsanitary living conditions. This is the most recent example of private equity firms’ vulturous approach to business.

Under the Carlyle Group, the ManorCare nursing-home chain saw a rapid increase in health-code violations, with allegations including signs of neglect and insect infestations. One might think, given how globally successful the Carlyle Group is, this is simply a fluke. However, the very goal of private equity firms almost necessitates the sort of short-sighted, profits-over-people result seen here. Any reasonable person might look at the now-bankrupt ManorCare chain as a massive failure from both a moral and business perspective, but for Carlyle Group, it was a resounding success for one simple reason: they made a profit.

Private equity firms exist to “pool money from investors, borrow even more, and then use that money to buy, revamp and sell off companies.” As such, they are concerned with turning a profit quickly for their investors, not the long term survival of the companies they purchase. This is ironic given how private equity fund managers are able to use the carried interest filing status to lower their tax responsibility. The lower carried interest marginal rates were originally intended to promote investing, which is a risky business, by giving investors a lower tax burden. However, due to the carried interest loophole, private equity firm managers, who invest other people’s money, have been able to use the same filing status despite not taking on the risk of investing themselves. With their highest marginal rate at 20%, these “job creators” pay less tax as a percentage of their income as the people whose jobs they are supposedly creating.

Beyond avoiding their fair share in taxes, private equity firms are often job destroyers, further hurting the economy. The recent demise of Toys ‘R’ Us is a perfect example. For years private equity managers from KKR, Bain, and Vornado (the three funds that took over management of the company in 2004) claimed that they saved the company and created 62,000 jobs by taking it over. The truth is, the company was in healthy financial shape when it was bought for $6.6 billion (of which $170 million went to 21 executives who negotiated the deal). Yet, despite being profitable, stores around the country were closed so the buildings could be sold. The private equity managers then used the money from those sales to pay off some of the billions they borrowed to buy the company. Because the private equity firms had liquidated most of the chain’s assets and saddled it with the debt they accumulated buying it, Toys ‘R’ Us was  unable to properly invest in online retail to remain profitable, ultimately dooming it.

In March of this year, the company announced it would close all of its stores, leaving thousands of workers without jobs or severance while bankruptcy lawyers and advisors pocket nearly $350 million. At the same time, investors made out handsomely. Likewise, in the case of HCR ManorCare, investors became wealthy at the expense of the most vulnerable among us– the sick and elderly.

What these events tell us is that private equity firm managers are not job creators deserving of a tax loophole. In fact, given their ability to upend the lives of workers and consumers, they should be under greater scrutiny and subject to more regulation and taxation, not less.

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