The Tax Explanation for the Romney Leveraged Buyouts

Abstract

Mitt Romney accumulated his wealth as managing director of Bain Capital, a leveraged buyout fund (LBO). LBOs are driven by tax savings. Tax savings are transfers from other people to LBOs without any increase in GDP or national wealth. An LBO replaces the stock of established companies with debt. Johnson argues that because interest is deductible, the replacement can increase the value of the surviving stock by two to six times without any improvement in operating income. The increase in debt harms the private economy because the companies become very fragile and the leverage encourages the owner to bet the company.