Newspaper article International New York Times

Bush Bites Hand That Feeds Him

Newspaper article International New York Times

Bush Bites Hand That Feeds Him

Article excerpt

Jeb Bush has called for raising taxes on carried interest and eliminating companies' ability to deduct the cost of interest payments.

This year, Henry R. Kravis, the private equity investor, held a $100,000-a-plate fund-raising dinner for Jeb Bush at his Park Avenue apartment in Manhattan. The guest list was a who's who of private equity and real estate executives, including Jerry I. Speyer, the billionaire New York property owner.

The dinner raised more than $4 million.

That's why Mr. Bush's tax reform plan -- unveiled last week and a likely topic of discussion at Wednesday night's Republican debate -- was such a surprise.

Mr. Bush's proposal seems to take a direct shot at the very people who filled the tables that night to support him.

In a departure from Republican orthodoxy, his new tax proposal calls for raising taxes -- and closing a longtime loophole -- on carried interest, which represents investment gains largely from private equity and hedge funds. (In this regard, Mr. Bush was following his Republican rival Donald Trump, who has been criticizing the carried-interest provision for weeks.)

Even more worthy of attention is Mr. Bush's plan to eliminate the ability of companies to deduct the cost of interest payments. In other words, Mr. Bush is seeking to destroy an incentive for American companies to borrow money.

His policy could have a profound impact on almost every industry, but would especially affect the private equity and real estate industries, which have long relied on debt -- or leverage, in Wall Street parlance -- to increase their profits.

L.B.O. stands for leveraged buyout, a transaction that has made fortunes for the likes of Stephen A. Schwarzman of the Blackstone Group and David M. Rubenstein of the Carlyle Group. And eliminating the ability to deduct the cost of interest payments would make pursuing a leveraged buyout significantly less attractive.

Mr. Bush's plan could also make big public companies a lot less inclined to borrow money to pursue stock buyback and dividend programs. That would also significantly hamper the tactics of activist hedge fund investors, whose favorite move is to pressure companies to load up on debt to buy back stock.

If you believe share buybacks do little more than help chief executives increase their own compensation, or think private equity executives get paid too much, Mr. Bush's plan has great appeal.

With this tax plan, he appears to have bitten the hand that has fed him. It is hard to see how donors like Julian H. Robertson, the prominent hedge fund manager who hosted a fund-raiser for Mr. Bush in the Hamptons over the summer, or the investor John A. Paulson, who attended a breakfast fund-raiser in Manhattan, could be thrilled about those provisions of his tax plan.

Mr. Bush's plan is particularly striking because he briefly sought a career in private equity just two years ago when he helped start a firm called Britton Hill Holdings, which invested in aviation and energy. …

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