Time To Ban Private Equity and the Carried Interest Tax Loophole

It’s clear that predatory capitalists— hedge funds, private equity funds, and real estate developers—have taken over the investment world with the help of the Trump administration, as well as the Biden administration.

Private equity is one of the greediest forms of unregulated capitalism.  It deceives the public, misleads investors, and bribes politicians and regulators at the state, local, and national levels.  And that’s just for starters.

Private equity can harm businesses, restrict market access for individual investors, and, in the real estate market, distort the housing market, making it unaffordable for average people to buy a home.

This is old news.  However, like everything else that involves money and politics, private equity takes a long-term view and is not distorting or exploiting markets.

Many homeowners are receiving unsolicited phone calls from unidentified individuals asking if their homes are for sale.  They primarily come from private equity firms that offer cash and purchase homes on an as-is basis.  They will then modestly fix it up, list the house, or rent it at a high market value to recoup their investments.  They do this thousands of times a month, and soon homes are removed from the realm of local real estate firms and added to a private equity portfolio on a spreadsheet.

This decreases the available supply, raises prices and rents, and is another reason why housing is out of reach for so many buyers.

Private equity also distorts the stock market.  When a private equity firm acquires a public company and takes it private, it is delisted from the stock exchanges, and its financial information becomes inaccessible to the public.

What the public does see when this happens is that the operation of the firm acquired by private equity decreases. In restaurants, portion sizes shrink, ingredients are cut, staff size is reduced, service levels decline, and then consumers realize the restaurant is no longer appealing.  When this happens, lenders get stuck with significant debt, and investors suffer a loss.  Only the managers of the private equity firms make money, often from fees and other charges.

This is what happened to Payless ShoeSource, Sears, Red Lobster, Kmart, PetSmart, Party City, and Staples in the consumer sector.  Private equity has also expanded into the medical technology, healthcare, and even veterinary clinics, preschools, and funeral homes.

The best description of how they work, aside from the explanation given by Senator Elizabeth Warren in the attached video, is to watch the episodes of The Sopranos when the gang takes over a sporting goods store from its owner, who has huge gambling debts.  The owner first mortgages his house.  Then stops paying on it.

Soon, the episode shows the gang ordering massive amounts of sporting goods on credit, borrowing from anyone who does business with the store.  The unpaid bills pile up. One of the last scenes shows the owner sleeping on the store’s floor in a camping tent, with the store nearly empty.  In short, the Sopranos looted the business, victimized the owner and his employees, and the gang keeps all the money. As for the store’s owner, he loses everything.

That’s the private equity business model.

Corrupt Politicians Let Private Equity Into 401(k)s

Since the government accepts campaign contributions (bribes) from big business, private equity firms have given cash to allow their private equity funds to be included in the 401(k) plans of average, unsophisticated workers.

A recent decision by the US Department of Labor and the Biden administration to allow private equity funds into 401(k) plans is a significant benefit to major Wall Street investment companies, which will now enable investors to be exposed to high-fee, high-risk private equity funds.

In the latest setback for investors, the Biden administration’s Department of Labor (DOL) has reversed its earlier proposal to oppose the extension of private equity investment into 401(k) plans, now supporting it.

Biden earlier rejected this idea of allowing private equity into 401(k)s when Donald Trump proposed.  At that time, “Biden’s campaign criticized the Trump move,  that Biden “staunchly opposes regulatory changes that will lead to skyrocketing fees and diminished retirement security for savers. This regulatory action is another example of President Trump putting the interests of Wall Street ahead of American workers and families.”

But Biden was a weak leader, a corporate Democrat, with a massive ego.  He was ideal for a private equity attack.

The Fee Scam

Private equity, like banks and credit card companies, thrives on fees.

How much private fee income are we talking about?

One expert cited in the Daily Poster estimated these fees participants will pay to be near $13.7 million annually. To obtain the DOL’s approval, the Biden administration is rewarding the private equity industry for its significant campaign contributions. These came from a few private equity funds, but the largest was from the Blackstone Group, whose president, Steve Schwartzman, was a major donor to Trump and Biden.  Blackstone is the largest private equity firm in the US.

As noted in this article on this site, Bloomberg News found that Schwartzman, “the private equity mogul single-handedly accounts for the vast bulk of the reported contributions toward Trump’s re-election effort over the past 18 months from people associated with the 31 banks and investment firms that dominate the U.S. financial industry.”  His contributions alone amounted to $3.7 million of the $4.8 million from this group of private equity firms and banks.

As for Biden, the Daily Poster said, “Biden’s election bid was boosted by $350,000 worth of donations from top Blackstone executives to a super PAC backing his campaign. One of his top 2020 fundraisers was Jon Gray, the heir apparent to Blackstone CEO Steve Schwarzman (in the photo with Trump).

In all, Biden’s campaign raked in more than $3.8 million from donors at private equity and investment firms, according to OpenSecrets.”  Now, it appears that the Biden administration has appeased the private equity industry.

Revoke the Carried Interest Tax Loophole

Like other predatory capitalists in hedge funds and real estate development, not paying taxes is a huge part of their profitable business model.

Carried interest is an accounting provision that allows any profits earned by the general partner of a private investment fund to be treated as a long-term capital gain. These gains are taxed at a lower rate than ordinary income.It is also worth noting that this tax loophole was never enacted as a law. It was part of a revenue action issued by the Internal Revenue Service in 1993 and originally applied to real estate transactions.

According to Slate, the IRS tried to address when a piece of property was sold or traded in the future and determine how it would be taxed.  The IRS refers to this as a “realization event,” and if the transaction occurred more than a year after the real estate was acquired, the tax would be considered a long-term capital gain.  When carried interest was developed, hedge funds were not popular.

In this 2015 article posted here, Obama, like Biden, made campaign promises to close this tax loophole that favors private equity funds, hedge funds, and real estate developers. This carried interest loophole allows these hybrid financial firms to pay ordinary income tax rates on their compensation at the lower rate of 20%, as opposed to the higher rate associated with capital gains.Obama’s campaign pledge on tax reform was to close this loophole that the Obama administration said would raise $1 trillion over the next 10 years.

But Obama was never a reformer, a progressive, or a take-charge leader, and his administration eventually caved to the big donors.  Like the Clintons and Biden, Obama was a corporate Democrat, closer to a conservative Republican than the prominent reformer he pretended to be.

Taking Action at the Local Level

The best way to prevent the contagion of private equity is at the state and local level.  Petitions to local city councils, county boards, and state legislatures to avoid private equity takeovers would help maintain jobs, keep local businesses local, preserve the available housing supply for average buyers, and curb greedy firms from ravaging the local economy.

Eliminating the carried interest tax loophole would be possible with new Democratic and progressive leadership that does not accept bribes from private equity and hedge funds.  Without these reforms, the current “affordability crisis,” which is another way of talking about income redistribution and predatory capitalism, will ensure that the nation is run by corporations for generations to come.