At this moment, Jeb Bush isn’t likely to win the Republican nomination. As of press-time, he’s been hovering at around 8 percent in an average of the national polls, far behind Donald Trump’s 30 percent and significantly trailing neurosurgeon Ben Carson’s 16 percent share.
But imagine a universe in which Trump, whose off-the-cuff style has been the main ingredient of his success thus far, finally misfires with a remark offensive enough to tank his candidacy. Both Carson and Trump, the two anti-establishment candidates, will also have to offer more in the way of substance, which could weaken their populist personas and expose them to attacks from their enemies as election day draws nearer. So Bush still has a shot after all (as do others, by the way).
To private equity, Bush’s chances of winning the presidency have become of increasing importance ever since the former Florida governor released details of his tax proposals in an op-ed in the Wall Street Journal. Last month, Bush took aim at the industry’s fundamental economic drivers: carried interest and the tax deductibility of interest payments.
On carry, we doubt Bush’s plan to redefine it as ordinary income rather than capital gains would deter many business students from accepting positions at private equity or real estate firms. But his proposal to eliminate the tax deduction for interest on business loans is a serious threat to the leveraged buyout (LBO) model. Interest deductibility allows buyout funds to acquire companies using debt on highly advantageous terms. If Bush wins, and the debt tax shield is removed, private equity firms would suffer a significant increase in their cost of capital, which will make it harder to deliver the returns it has generated hitherto.
That, of course, assumes a Bush administration could enforce this change. The deductibility of interest is part of federal tax law, meaning it requires Congressional approval to change. Bush could offer a tax reform bill, but any sweeping reorganization of the tax code is a challenge few presidents have been able to achieve. Indeed, any change to interest deductibility at all, long a part of the US tax code, “would require a massive repricing of assets throughout the global economy,” says Debevoise tax lawyer Peter Furci.
Still, Bush’s political stance here is an important one. Despite his poor showing in the current polls, Bush is considered the “serious candidate” by Washington DC’s elite. If Bush says interest deductibility is on the negotiating table, it provides breathing room for all candidates (both Democrat and Republican) to do the same. President Obama himself has proposed slashing the corporate tax rate from 35 percent to 28 percent in exchange for limits to the deductibility of interest expenses.
While that measure stalled in Congress, the Beltway consensus for federal spending cuts, a ballooning national debt, and eagerness to cut the corporate tax rate to remain competitive on the world stage could give similar proposals life in the future. For that reason alone, Bush has given the industry a greater stake in the 2016 election than it would have had without his intervention.