On Newsnight last night, Blairite fatster Sion Simon MP demonstrated that he is too stupid to be trusted with glue. And Jeremy Paxman demonstrated that he no longer has any credibility, but we’ll get to that later.
Well, let’s deal with the fool before the knave. Simon was on the show to defend the government against trade unionists who are angry about private-equity funds buying into their employers. Now, there are a number of arguments you can have about this, for example whether the private-equity guys are more likely to squeeze the company for cash, or whether their ability to ignore the stock market is likely to offer stability.
But Simon wasn’t going to be bothered with any flummery about efficient capital markets, contestability, or similar rot. When the GMB representative he was facing suggested that the government should end subsidies to private equity, Simon pigged at the cam and snarled, several times, that “there is no subsidy!”
He doesn’t know what he’s talking about. Private-equity funds typically borrow heavily to buy into target companies, thus benefiting from leverage. This is crucial, because the tax system treats two forms of return to capital very differently. Dividends, paid to shareholders, are taxable. Interest, paid to creditors, is considered a cost of doing business and is tax-deductible. This is a subsidy to capitalists who use debt financing rather than equity financing, such as private equity funds.
Interestingly, nobody really knows why this is so – the convention that interest is tax-deductible began in the 19th century for no very clear reason. But the last person to ask about it is clearly Sion Simon MP.