Bain economics for dummies

My wife does not understand economics.  She read in Sunday’s New York Times that Bain Capital partners had evaded income tax by converting management fees into fund investments.  Bain partners saved at least $200 million in income taxes and more than $20 million in Medicare taxes.

“Why can’t we do this?” she asked.  “Why can’t we evade taxes on income simply because we invest it?” she asked.

“We can’t because we are individuals,” I responded.

Judith: So are the partners at Bain Capital.

Steve: You don’t understand economics.  We need to give Bain Capital partners tax incentives to create jobs.

J: So when Bain Capital buys a company, the company then hires a lot of people?

S: No. The first thing Bain Capital does is to fire a bunch of people.

J: How does this create jobs?

S: The second thing Bain Capital does is to load up the company with massive debt. Then they pay themselves a dividend equal to their investment.  That way they own the company without putting up a nickel.

J: And this creates jobs?

S: To gain control of a company without putting up a nickel, Bain Capital must pay a lot of lawyers, accountants, and bankers.

J: But those lawyers, bankers, and accountants already had jobs.  This country does not need more work for $300 an hour parasites.  It needs decent middle class jobs.

S:  That is why we must give Bain Capital partners tax incentives to continue to invest.

J: Do they invest their own money?

S: Of course not.  These are smart people.  They invest other people’s money, and get paid millions of dollars annually to do so.

J: If Bain Capital partners make millions by investing other people’s money why do they need tax breaks?  Wouldn’t they do the same things even if they had to pay the 35 percent tax rate that everyone else does?  This does not seem fair.

S: It’s not a matter of fairness.  It is a matter of incentives.  Without a tax breaks these partners have little incentive to work.  Why earn tens of millions if, like everyone else, you have to give a third of it to the government?

J: Doesn’t the average worker need the same incentive?

S: Not at all.  The average worker already has great incentives regardless of tax rate — if she does not work, she starves.  But the Bain Capital partners are very rich.  We need to provide extra tax incentives to keep them working.

J: How does benefit anyone other than the Bain Capital partners?

S: You don’t understand the economic theory of “Trickle Down.”  Trickle Down says we would all be better off if the rich paid less tax.

 J: That’s what the Bush tax cuts were supposed to do and we know how that turned out.

S: That’s why Romney says we need more tax cuts.  Then the rich will get more money to trickle, and there will be more poor and unemployed to get trickled on.  It takes time for Trickle Down to work.

J: How long does it take?

S: In France the Bourbons tried it from 1589 until 1789.  Two centuries wasn’t quite long enough.

J:  You’re crazy.  You say we must allow the Bain Capital partners to evade taxes so they will continue to invest other people’s money to fire people so that the Bain partners can pay themselves a dividend and own a company for nothing, thereby making the rich richer.  And if the Bain Capital partners quit tomorrow, Trickle Down might take four centuries rather than three centuries to work.  Let the Partners quit tomorrow.  What else would they do?

S: They could run for office?

J: Now I get it.  We need to allow Bain Capital partners to evade taxes to keep them from running for office.