Private equity – simply a bunch of free-riders

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The Guardian did a feature on private equity yesterday. There was a response from the industry today.

What was disappointing about the article, and this was of course ignored in the response, was its failure to mention that private equity generates much of its additional return by free-riding the states in which it earns its profit. They do this quite simply: they incorporate offshore.

Sure, they still pay some tax in the countries where they run real operations. But you can guarantee there is leakage through management charges, licence fees, loan deductions and the rest of to offshore. For explanation of all this see chapter 4 of ‘Closing the Floodgates’.

Put simply, these compnaies use the infrastructure of the states that provide them with the markets in which they operate, and which cushion their risk but pay inadequate returns in exchange. In addition, by choosing to be extremely opaque they deny the duty to be accountable. And who knows where they get their funds from? How do we know that laundered monies are not involved? Do they? These are questions we cannot answer, and that’s unacceptable.

In fact, this is a profoundly unsatisfactory business based on several uncomfortable assumptions. The first is, as the Guardian article noted, that:

Employees are a little further down the pecking order in private equity

The second is that the state can be ignored. That’s wrong. States are made up of people. People provide markets. Markets can only function with the state enforcing property rights. If you ignore the state for long markets will fail. That’s the fallacy at the core of modern capitalism.

I believe in markets. That’s why I believe in tax. I seriously wonder what these people believe in bar cash. But when cash is king you can be sure the edifice will collapse. Arguments on tax are about much more than paying the right amount.