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LISA NAPOLI: Private equity buyers are swarming around the phone company Alltel. The Wall Street Journal reports this morning that suitors are holding meetings with the $22 billion phone company. Meanwhile, how to account for the incomes of private equity partners is the subject of informal meetings on Capitol Hill this week. Marketplace commentator Robert Reich has some advice for them.
ROBERT REICH: Way back in the 1970s, newly-minted MBAs with dollar signs in their eyes wanted to be CEOs.
And then in the 1980s, they went into investment banking, because the money was even better there.
In the 1990s, they went into high-tech venture capital and dot-coms.
Now, it's private equity.
Why? Well, the average big-company CEO has to do with a measly $7 million a year, taxed at 35 percent. But private-equity partners raking in hundreds of millions a year are taxed at 15 percent — less than the tax rate paid by middle-class Americans.
And what exactly do private-equity partners do? They use the investment money of pension funds and college endowments and wealthy investors to buy up publicly-held companies and turn them briefly into privately-held companies.
And then they do what you might do when you want to resell your home — redecorate, refurbish, knock out some walls, apply fresh paint, sell the furniture.
Sometimes, they keep the same CEO of the publicly-held company, give him some private equity too and tell him to apply the good ideas he's stored up but never implemented when he was just earning $7 million a year as CEO. Because now he can really cash in.
And then a few years later, the private-equity partners resell the company to the public — usually at a big profit, with a fat cut of billions of dollars for themselves.
And those billions are only taxed at 15 percent. That's because those billions are considered a capital gain from investment. And courtesy of the Bush tax cuts, that tax rate is the lowest ever.
But really, those billions are compensation. What these guys pay themselves for their work.
Now, the tax-writing committees of Congress are taking a look at this giant loophole and private-equity partners are besieging them.
And of course, screaming: "No! You can't do this to us. We won't work as hard if we're taking home only $60 million a year instead of $80 million. And that will cripple the American economy."
NAPOLI: Former Labor Secretary Robert Reich now teaches public policy at the University of California Berkeley. In Los Angeles, I'm Lisa Napoli. Enjoy the day.