Mitt Romney made his fortune in private equity — but don’t expect his new running mate to defend it.
Paul Ryan, who has some big Wall Street backers, has expressed support for a tax-reform bill that would make leveraged buyouts — central to the PE business — considerably less profitable.
The Bipartisan Tax Fairness and Simplification Act of 2011 aims to lower the top corporate tax rate, without expanding the deficit, by closing loopholes and tax breaks — including one that encourages companies to load up on debt. The bill would limit interest tax deductibility that favors debt over equity.
Any change in the tax treatment of debt would threaten the lifeblood of the private-equity business — including Romney’s former firm, Bain Capital — which counts on the deduction to make debt-laden deals more profitable.
“I think it’s fair to say Ryan is open to the bill,” said Sen. Mark Begich (D-Alaska), one of the co-sponsors of the bill, told The Post. “I know co-sponsor Ron Wyden (D-Ore.) has been in discussions with Paul Ryan, and he and others think there is a good basis here.”
Begich said the bill is close to “revenue-neutral,” meaning that the money it saves (from actions that also include forcing companies to pay taxes on overseas income) goes toward reducing the corporate tax rate from 35 to 24 percent.
Ryan is open to this attempt at tax reform because of its revenue-neutral nature, in keeping with the pledge taken by followers of Grover Norquist that lawmakers not raise taxes.
Typically, PE firms put down around 30 percent of the purchase price and have the acquired companies borrow the rest.
A study of 80 companies involved in leveraged buyouts conducted in 2009 by Notre Dame professor Brad Badertscher found those businesses paid about a 22 percent marginal tax rate before being bought and only 10 percent the year after going private.
PE firms, which own companies employing 1 out of 10 Americans, saved an estimated $127 billion in US taxes since 2000 through this deduction.
Under the current tax code, PE firms are allowed to deduct all of their interest. The sponsors of the bill favor a formula that — based on the rate of inflation — could slash the deduction in half, according to Begich.
Begich said he and the co-sponsors of the bill, which is picking up supporters but doesn’t have a chance of passing before the presidential election in November, are flexible on the details.
He said that limiting corporate interest tax deductibility is an important element of the bill “but not a deal-breaker.”
Meanwhile, the private-equity industry’s lobbyists are working to knock out that piece of the bill.
“Have they been lobbying? Yes,” Begich said.“If the bill gains momentum, they will be knocking at the door pretty hard.”
A Washington source close to the sponsors of the bill said Republicans are focused on eliminating loopholes and advantages in the tax code.
“There will be pressure on the Republicans to pursue tax reform after the election,” the source said.
Ryan’s office referred a request to Romney’s office, which didn’t respond.