Most Americans are profoundly disgusted by Wall Street, but few question the need for a healthy financial sector to promote economic growth. Businesses need credit to prosper, and prosperity is a fundamental goal of our society. That's why our government affords special protections, and guarantees and loans to the financial services industry.
But when financial services firms actually undermine our society's goal of economic growth, they should not be granted favors, privileges or protections. And now that tax season is over, it's a good time to remind people that private equity firms that destroy productive companies should not receive special tax treatment.
But they do. Private equity fund managers pay a much lower tax rate than ordinary Americans. A loophole in the tax law lets them treat most of their income as capital gains, and so they pay a 15 percent tax rate on those gains. That's less than half the 35 percent rate that ordinary Americans pay on income from their paychecks.
And that's wrong. Private equity firms don't deserve special tax treatment because they choke economic growth by wrecking healthy companies.
They do it by draining a company's cash so it can no longer afford to pay decent wages, buy new machinery, invest in technology or compete in the marketplace. Nearly half of all companies owned by private equity firms in 2009 were on the verge of collapse, default or insolvency, according to Moody's Investor Service.
The Teamsters have had plenty of experience with private equity firms, and it hasn't been pretty. Time and again, private equity firms have bought good, profitable Teamster employers only to devour their cash.
Kohlberg Kravis Roberts & Co.'s history with Teamster employers is one of underinvestment, stretching workers and equipment to the breaking point. KKR's pattern has been to kick to the curb the carcasses of what were once productive enterprises.
Here are some of the things witnessed at companies owned by KKR:
•After KKR and its partner CD&R bought U.S. Foodservice, Inc., in 2007, Teamsters drivers began complaining the company was pushing them to work 14-hour days in aging trucks. More than 1,400 warehouse and driver jobs were lost across the United States within one year. The company drew federal complaints for violations of almost 200 labor laws in Phoenix, which it settled by rehiring workers it had illegally fired. Discrimination lawsuits against the company are pending in four states.
•When KKR owned Accuride Corp., questions arose about whether capital investment had been adequate. In January 2007, a floor collapsed at Accuride's GUNITE Foundry in Rockford, Ill. A worker was found clinging to the top of a dust-collecting machine after the floor fell beneath him. In 2006, wheel forge presses at Accuride's Erie plant broke down, disrupting production. Less than 18 months after KKR exited the company, the shares were delisted.
•After its two-year stewardship of Dollar General, KKR announced that it would take the company public after appropriating $385 million in fees and dividends for itself and its partners - approximately half the value of the IPO. There were reports of continued serious safety violations during KKR's ownership of the company.
The House of Representatives recognizes the folly of rewarding such behavior. It first closed the tax loophole for private equity fund managers 2½ years ago and has done it again twice since then. President Obama also wants to eliminate the tax break. But the Senate has not voted on ending the incentive for greedy investors to wreck our economy.
If the Senate really wants to promote broad-based economic prosperity, it will close the tax loophole for private equity fund managers.