How might the fiscal cliff be handled by private equity professionals in comparison to elected officials?
Private equity professionals are a very dissimilar bunch of individuals, although there is a common thread among this group – the competitive search for maximum output at minimum cost.
Certain unaware individuals may assume, based upon a few selected stories, that this search for maximum profit comes at all costs, mostly at the expense of higher cost labor and the financial health of the pre-deal company.
On the contrary, private equity professionals will generally dispute the notional stereotype with actual examples of increased employment and improved business conditions after post-involvement. The latter is probably the case a majority of the time, although some evidence argues that private equity may only increase employment around half of the cases.
As a general rule, individuals concerned about the effects of private equity on workers generally turn to government policy to address their worries. Likewise, individuals concerned about the effect entitlement reform could have on government-dependent individuals turn to government programs and policy for support.
In contrast to the generally myopic worker-concern of the majority involved in the fiscal cliff discussions currently, it’s probably reasonable to assume private equity professionals would give more equal weight to the longer term conditions of the United States balance sheet in addition to the concerns about government-dependent individuals.
It’s not as if Democrats are unaware of the need to improve the United States’ balance. Instead, party leaders appear to be more concerned with revenue side (meaning higher tax revenue) than the cost side (reducing expenditures).
Just how much different would a group of diverse private equity professionals handle the fiscal cliff debate in comparison to the group doing it right now. Well, probably a lot different.
| What happens if: | ||||
| Area | No deal | Short-term deal | Potential grand bargain | Private equity solution |
| Bush Tax Cuts | 39.6% above $250K | 39.6% above $500K-$1 million | 39.6% above roughly $500K plus future base broadening | Return on investment too low to justify increased tax rates; extend the reduction in the tax rate burden on all |
| Top dividend rate | 43.4% | 24-28% range | 24-28% range | Eliminate |
| Top capital gains rate | 23.8% | 24-28% range | 24-28% range | Eliminate |
| Lower and middle income tax cuts | Expire | Extended | Extended | More than likely reduce the burden to less than the Bush rates |
| Estate tax rate | 55% | 45% | 45% | Eliminate |
| Estate exemption | $1 million | $5 million | $5 million | Eliminate |
| Payroll tax cut | Expires | Expires | Expires, but potential phaseout of up to 2 years | Maybe expire, although debate would likely be heated |
| Sequester | Takes effect | Delayed about 9 months | Repealed | All cost reductions to take place, with probably more improvements on the cost side of the balance sheet than what is currently on the table |
| AMT | Possibly fixed | Fixed | Fixed | Fixed |
| Physician Reimbursement | Possibly fixed | Fixed | Fixed | Reduce expenditures |
| Tax extenders | Not extended | Some extended | Some extended | Extended |
| Unemployment benefits | Not extended | Partially extended | Partially extended | Probably most extended until at least 2014 |
| ACA investment taxes | Take effect | Take effect | Take effect | Not allowed to take effect |
On the Bush tax cuts, a group of private equity professionals probably would not let the long term economic conditions of the United States deteriorate for short term solutions to improve the tax revenue side of the balance sheet. Anybody disagree that the majority would not take this view?
On the dividend and capital gains tax rates, a majority of private equity professionals would likely let these two be eliminated by phasing out over many years.
On lower and middle income tax cuts, private equity professionals would likely be unwilling to let individuals making under $250K have their tax rates rise. In fact, it wouldn’t be very surprising to see tax rates reduced by more for the “non-rich” than for the “rich.”
On the estate tax rate and the exemption base, both of these would likely not be allowed to increase. On this subject, there would likely be more agreement than on most of the other tax issues.
Perhaps the issue that would divide the group the most would be the issue of the payroll tax cut. Would private equity professionals really let this rate rise to improve the balance sheet or would the majority favor more debt?
On sequester, these costs would likely take effect, something Republicans or Democrats are not likely not willing to let happen.
The AMT would likely be fixed, while the physician reimbursement issue would likely end with lower physician costs than either Republicans or Democrats would be willing to accept.
On the tax extenders and the unemployment benefits issues, both would likely be extended, although a large minority would likely vote in favor of reducing the unemployment benefits costs.
Finally, the ACA taxes would likely not be instituted, regardless of what the law stated.
Anyone disagree with the brief conclusions?
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