Middle Class Held Hostage by Fat-Cat Corporate Raiders

As a central villain in the famous book Barbarians At the Gate, Henry Kravis has become one of the world's richest mavens of private equity -- the Wall Street sector that buys up companies, breaks them apart and sells their assets. In 2006, Kravis made $450 million, or more per hour ($51,000) than the average American household makes in a year. Incredibly, his wealth puts him right within the average for executives in this largely unregulated industry that oversees about $400 billion in annual business.

Brutes like Kravis haven't amassed such treasure by playing nice. During their takeover rampages, they often crush workers and leave communities for dead. And now, as we've seen over the last month, when the tax man comes calling, these barbarians start taking hostages.

Congress, you may have noticed, is trying to prevent the Alternative Minimum Tax (AMT) from hitting the middle class. This tax was originally designed to prevent billionaires like Kravis from using creative accounting to avoid paying any taxes whatsoever. However, the AMT did not adjust for inflation, and so the tax now threatens to hammer millions of ordinary Americans.

To prevent this unintended consequence without adding to the national debt, Congress has to find about $50 billion. That is roughly the amount stolen each year through a tax loophole allowing those like Kravis to pay a lower effective tax rate than the servants who tend to his 26-room Park Avenue penthouse. Instead of paying the 35 percent income tax rate, private equity managers are permitted to pay the 15 percent capital gains rate on most of their earnings. They are also allowed to use offshore corporations to shelter their income from taxes.

In November, House Democrats passed a bill to prevent the AMT from hitting the middle class. The legislation included language shutting down the Henry Kravis Loophole. William Stanfill, a Colorado venture capitalist who testified to Congress in support of that provision, correctly says there are no negative side effects to "taxing rich white guys the same as the rest of the population."

However, when the bill hit the Senate, the Washington Post reported that "a sprawling, big-money lobbying campaign" stopped it cold.

In the first nine months of 2007, the private equity industry spent about $20 million on campaign donations and lobbying. That kind of cash is barely a fraction of what just one executive like Kravis saves each year thanks to the tax loophole. But it was more than enough to convince a bipartisan group of senators to block the loophole-closing bill, thus creating today's hostage situation.

The first set of hostages are those honest people who -- rather than trying to avoid taxes like the Henry Kravises -- paid too much in taxes. The IRS says that up to 32 million tax refunds could be delayed because the AMT tax bill has been indefinitely stalled.

The second set of hostages is the middle class. If the private equity executives' campaign ends up killing the AMT bill altogether, millions of households making between $50,000 and $100,000 a year could be forced to pay an average of $2,000 in new taxes -- not exactly helpful at a time of ballooning health care premiums and mortgage payments.

Then there are millions of kindergartners, most of whom don't yet know what a tax is. If Congress passes the AMT relief measure without paying for it, those kids will be forced to pay the added interest on the national debt when the bill ultimately comes due.

To fathom the boldness of this hostage-taking, note that it is all happening at the very same time Bloomberg News reports that the IRS has launched an investigation "into suspected tax abuses at hedge funds and private-equity firms after determining many firm partners don't file returns and may have improperly characterized transactions."