More politics? Yes. But in a vaguely upbeat way. • 21 June 2007 • The SnowBlog

More politics? Yes. But in a vaguely upbeat way.


Nice to see that the Treasury is unimpressed by the idea of lowering tax on Private Equity (PE) investments. I was one of those who initially liked the concept of Private Equity turnarounds. You combine a crack management team with a big equity fund and buy a business with the intention of renovating it - usually with a plan to go public again in a year or two.

In case anyone doesn't know what those words mean, but would like to, let me explain. 'Going public' means selling shares in a company on the stock exchange to anyone who wants to buy them. The people who own the shares own the company and are entitled to the profits. The first stage of a private equity deal, though, is usually the opposite: to 'take the business private' - which means buying up all the shares of a business so you own it outright. In a PE deal, the money for that comes from an investment fund. Investors put money into a PE fund and the fund goes out and buys a company with that money. The investors get their money back, plus profits, when the company is sold by once again 'going public'.

Good PE deals shake up stale businesses and show others in the industry that change is possible. Bad ones are not much more than asset stripping.

The money for these deals often goes through a number of offshore holdings companies. Nothing necessarily wrong with that: it's about making sure the tax, bankruptcy and ownership rules fit the deal you're trying to do. Although I suppose one could argue that a deal that was good for Britain wouldn't need to go via the Cayman Islands. The other reason these holding companies, or Special Purpose Vehicles (SPV)*, can seem dodgy is that they hide details of ownership. Even if you could jump on a plane to the island of Nauru, the banks there wouldn't show you their files. I'm sure most big deals are legit, but there's at least one where I believe a full disclosure of ownership would cause a major scandal. (Sadly there's no way for me to say any more without putting Snowbooks at risk.)

The point, though, about whether these deals should be taxed relates to something at the heart of capitalism: it's the fact that there's no capitalism in the wild; it's always artificial, it always takes place inside an economy where the taxes and laws have been set up a certain way. In other words, it's a game played according to rules, and the rules can be as fair or as skewed as you want.

That's why when right-wingers talk about the need to reward success I always want to say, "Ahhh, well, but...". Because success is a lot easier to achieve if you're paying 5% tax than 50%. In America, for instance, the economy overall is growing fairly nicely, but almost everyone in America is effectively poorer than they were a few years ago. How is that possible? Well, the gains that push the average up are confined to a small group of people who have got very rich indeed. And a big part of that has happened because taxes on big business and private investment have gone down. If you make your money in the form of a salary, you'll pay as much tax as ever, maybe more. But if it's share options, or earnings on investments, you might be handing over a lot less to the government. Similarly, small businesses pay as much tax as ever, but big businesses pay a tiny fraction of what they used to.

Why should this be? Well I believe it's because government sets the rules under which capitalism operates - and big business (at least in the U.S.) puts vast amounts of money and effort into influencing those rules. The credit card companies lobby over bankruptcy laws, the logging and mining companies help draft environmental laws, the pharmaceutical companies make sure citizens don't buy their drugs cheaply from Canada, and the weapons and oil companies... arrange for their suggestions to be classified.

So the point is, it's nice to see that while the U.K. government might do whatever the White House tells them, they haven't yet made the placing of foxes into henhouses a matter of general policy.

*I had an SPV as a child, but that was a Spectrum Pursuit Vehicle of the kind favoured by Captain Scarlet. spv.jpg


Interestingly, I seem to have underestimated the extent to which the U.K. has followed the same course as the U.S. The Guardian is doing a special feature this week about how Britain is effectively a tax haven for billionaires and the middle class are realising they've been left behind. Not sure how sympathetic I am to the middle class's plight, but if they get militant enough about it, there might be a reining in of the 'tax breaks for the rich' movement.


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