How Carlyle Hurts Public Services by Avoiding Taxes
The Carlyle Group was literally born out of profits made from tax loopholes. In 1987, David Rubenstein and three partners saw an opportunity to profit off the financial troubles and bankruptcies of Native Alaskan Corporations.i Taking advantage of new tax laws that allowed struggling Native Corporations to sell their (tax deductible) debt to other parties, who could then write off the debt on their own corporate taxes, the partners did an estimated $1 billion worth of deals, and their share--approximately $10 million--allowed them to set up the Carlyle Group.ii
Carlyle continues to benefit from favorable tax rules. Rubenstein himself pays only the 15% capital gains tax rate on his take of buyout profits rather than the 35% income tax that regular wage earners in his tax bracket are required to pay.iii The IRS is investigating whether private equity firms may also be using offshore corporate structures, cross-border loans and improper accounting methods to shield earnings and assets from the taxman. Carlyle and other firms have paid dearly to protect their tax break--both through big lobbying bills and big political contributions--arguing alternately that it is "equitable" and that it is justified simply because it's long been on the books.
But the carried interest debate is just the tip of the private-equity-tax-avoidance iceberg; by loading up the companies it buys with high levels of debt, Carlyle -- like every other private equity firm -- benefits from big tax deductions. Already, corporate taxes account for only 7% of the country's tax revenues, and this practice has the potential to drive big business' share even lower.
How does this play out in practice? Consider the proposed Carlyle buyout of Manor Care nursing homes. Because the buyout includes $4.6 billion in new debt, under Carlyle ownership Manor Care will be required to pay little or no corporate taxes. This practice of avoiding corporate taxes is especially troubling in the case of Manor Care because, like most nursing home companies, the company receives two-thirds of its revenue from federal and state taxpayer-funded payments, including Medicare and Medicaid.
[i] http://findarticles.com/p/articles/mi_gx5202/is_1989/ai_n19121765/print
[ii] Dan Briody, The Iron Triangle: Inside the Secret World of the Carlyle Group (John Wiley and Sons, 2003 ), pages 6-7.
[iii] http://www.busrep.co.za/index.php?fSectionId=&fArticleId=4151784