LBOs and Taxes: No One to Blame but Ourselves?

Corporate tax savings explain more the 80% of the value created by the typical LBO. Our tax system, which allows firms to deduct payments to bondholders but not to stockholders, provides a primary impetus to the LBO movement. The 1986 Tax Reform Act further increased the benefits to extreme leverage. While privately profitable, LBOs have created an economy much more at risk to even moderate economic downturns. The culprits are not the corporate raiders, but rather ourselves—by creating a tax code which virtually requires firms to use leverage.