The fight over how private equity managers' compensation should be taxed obscures other breaks that are central to the buyout industry's business model.
President Barack Obama and other Democrats have spent several years arguing for higher taxes on the carried interest earnings of private equity executives. What makes private equity deals so profitable, though, is the tax deductibility of interest.
"Part of the so-called value that's created in private equity buyouts is really just reshuffling the balance sheet" to take advantage of the interest deduction and other tax breaks, said Victor Fleischer, a law professor at the University of Colorado who tracks the private equity industry.
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