Among the things largely absent from the 2012 Republican National Convention has been any mention of Bain Capital and any fidelity to the truth. After the first two days, the GOP's twin frauds about welfare and "we built that" were once again demolished, prompting Team Romney to protest that "we're not going to let our campaign be dictated by fact checkers." Adding to the embarrassment was a prime-time presentation on how to build your small business by selling to the government.
As it turns out, the silence about Mitt Romney's old company (which only ended on the ceonvention's last night) and the Republican sham that "you didn't build it" are related. Because when it comes to Bain Capital, in a very real sense you did build it. After all, your United States tax code doesn't merely allow the "carried interest exemption" that enables the likes of Mitt Romney to pay a lower rate than many middle class families. Without the public subsidy that is the corporate debt interest deduction, there might not be a Bain Capital--or a private equity industry as we know it--at all.
As the history shows, on his road to becoming a $250 million captain of private equity at Bain Capital, Mitt Romney had a lot of help from his uncle. Uncle Sam, that is. Writing in Rolling Stone, Matt Taibbi explained how:
Essentially, Romney got rich in a business that couldn't exist without a perverse tax break, and he got to keep double his earnings because of another loophole - a pair of bureaucratic accidents that have not only teamed up to threaten us with a Mitt Romney presidency but that make future Romneys far more likely. "Those two tax rules distort the economics of private equity investments, making them much more lucrative than they should be," says Rebecca Wilkins, senior counsel at the Center for Tax Justice. "So we get more of that activity than the market would support on its own."
Then-Bain Capital CEO Mitt Romney concluded as much when he acknowledged, "There's a lot greater risk in a startup than there is in acquiring an existing company." So he fatefully redirected his firm from venture investments in new companies like Staples and instead became a leveraged buyout king. To understand both why he did that and how all American taxpayers helped make it possible, a little background is in order.
Private equity owes its success in no small part to that uniquely American provision of the corporate tax code. The New York Times recently helped explain why:
Companies can finance investment from either debt or equity. Companies can finance investment from either debt or equity. But profit on an investment financed with equity -- stock issued by the company -- is taxed. In contrast, if the project is financed with debt, then only the profit after interest payments are made is taxed. This means debt-financed investments are cheaper than equity.
And not just a little cheaper. As the Treasury Department recently explained, "The effective corporate marginal tax rate on new equity-financed investment in equipment is 37 percent in the United States. At the same time, the effective marginal tax rate on the same investment made with debt financing is minus 60 percent--a gap of 97 percentage points." The result:
This creates a bias by corporations toward debt.
Or, for the likes of Mitt Romney, a business model.