The Bain Of This Campaign

Andrew Sullivan —  May 21 2012 @ 12:59pm

A reader writes:

Neither side gets the Bain story correct. Two concepts are missing from the conversation. The first missing concept is "Cash Cow." Bain did not target "troubled companies." Cash Cows, instead, are profitable, with good cash flows, but relatively-slow growth, and paying standard tax rates with few write-offs. The second missing concept is "Tax Arbitrage," which is, very simply, this:

You take the Cash Cow, paying, say, 30% in taxes, and use various strategies to drive the tax rate to near-zero without killing the cash flow. Then you pocket the 30%, and the investors pay lower capital gains and "carried interest" tax rates on those extracted "tax savings."

For roughly half of the companies receiving this "operation" will die because of the high debt and other obligations brought on by the Tax Arbitrage strategy. But you, the equity capital firm, get your investment out early. Half of the companies will prosper under this treatment (though not for existing employees who are outsourced or downsized), and you flip those to new owners for huge profits, taxed at capital gains rates.

This is NOT "Capitalism." This is manipulation of the tax code for profit for some, at the expense of others. Millions of Americans work for years for Cash Cow companies. Slow growth is not a sin; it is a reality in many businesses, and a good Cash Cow can provide employment and community stability to generations of workers and their families.