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SCOT LEHIGH

Practicing what GOP preaches

HERE’S WHAT’S odd about the Republican primary dust-up over Mitt Romney’s days as a leveraged buy-out specialist and the low tax rate he paid last year. Although his GOP rivals have made hay of both, Romney has merely practiced what his party preaches on economics.

I don’t mean that facetiously. Start with the 15 percent rate Romney says he paid in 2011. Sure, it strikes some as unfair that the fabulously wealthy Romney paid at a lower rate on his unearned income — which is treated as capital gains — than many middle-class people do on their wages or salaries.

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But Republicans have long advocated lighter taxes for capital gains on the theory that such favorable treatment will promote capital formation, investment, and risk-taking, and thus catalyze economic growth.

For Republicans, encouraging growth trumps concerns about tax fairness or income inequality. Indeed, at least rhetorically, that’s the GOP’s principal reason for opposing the expiration of the Bush tax rates for upper earners. The well-to-do, conservatives contend, are the nation’s “job creators.’’ Indeed, in the GOP view, it’s more important to protect the tax breaks on upper income than to insulate Medicare and Medicaid from the deeper cuts that will be required absent more revenue.

Democrats, of course, have a different view. They see overall demand as far more important than capital formation or business investment in spurring the economy. For them, income inequality is not simply about fairness, but also economics; if middle-class and lower-income people have less in their paychecks and pockets, they won’t do the consumer spending the economy needs to grow at a healthy clip.

Paradoxically, though Democrats are less enthusiastic about unfettered free markets, they also tend to see capitalism itself as a hardier beanstalk, and thus less in need of tax-cut waterings, than do Republicans. Therefore, Democrats consider tax breaks for the well-to-do, whether on earned or unearned income, as rewards for activity that likely would have taken place anyway.

Now to Romney’s role at Bain Capital. Candidate Romney likes to talk about start-ups Bain backed during its early years, when it was focused more on venture-capital deals that helped build businesses from scratch. And certainly companies like Staples, Sports Authority, and Bright Horizons are the kind of unequivocal job-creating successes that are easy to celebrate.

So far, Romney has tried to finesse, rather than address, those issues.

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Romney talks far less about what happened after Bain Capital changed its orientation in the 1990s, moving away from venture capital to focus far more on leveraged buyouts. In LBO deals, a private-equity firm borrows heavily to purchase companies that are then restructured and resold, often for big profits.

Unflinching free-marketeers see that as admirable activity that takes sleepy, under-performing companies and makes them more productive and profitable. Liberals, however, are often queasy about leveraged deals. In part, that’s because LBO shops usually load an acquired firm with the debt incurred in its purchase, even while taking hefty management fees. In part, it’s because they try to slash costs through layoffs or reductions in wages and benefits.

Now, one can certainly interpret that cost cutting as an effort to right-size the workforce and determine wages based on the labor market. Yet the fact remains that LBO practitioners are often wringing money from moderate-earning workers and using the savings to enhance a company’s resale price. Further, because interest on the debt incurred to acquire the firm is tax deductible, taxpayers are essentially subsidizing their enterprise.

So far, Romney has tried to finesse, rather than address, those issues. That muddle-through approach may suffice in primary season, but it’s less likely to work in the general election. Which is why, if Republicans are truly confident in their economic philosophy, they should engage the country in an energetic discussion of their ideas. Yes, it’s easier to run against the straw man of Barack Obama as crypto- or pseudo-socialist. And yet, if Republicans can’t persuade voters that their economic philosophy is right on the merits, they are unlikely to prevail in the fall.

Scot Lehigh can be reached at lehigh@globe.com.
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