Administration Sees No Need to Cut Tax Break on ‘Junk Bonds’

A ranking Treasury official told Congress on Tuesday that the Administration sees no need to change the tax laws to discourage “junk bond” financed takeovers, in an apparent flip-flop that provoked an angry reaction from House Democrats.

Testifying before the Ways and Means Committee, acting Assistant Treasury Secretary John G. Wilkins said the Administration sees nothing wrong with the wave of takeovers and leveraged buyouts. “Conditions do not warrant us to do anything at this time,” Wilkins said. Only if the leveraged buyouts “get out of hand,” will the Administration offer a proposal, he said.

Wilkins’ testimony marked an apparent shift from the position the Administration espoused last February, when Treasury Secretary Nicholas F. Brady told Ways and Means members that the Administration could accept a trade-off on the issue. Brady said the tax deduction for the borrowings that fuel takeovers could be tightened, provided that Congress also eased taxes on corporate dividends.

Brady’s words seemed to suggest that Washington might finally act to substantially limit takeover activity, a step Congress has often discussed but never taken during the decade-long takeover boom. The Ways and Means Committee, which handles tax matters, expected Brady to prepare a legislative package.

Fears Harm to Economy

But Wilkins, while denying that there had been a change in Administration policy, dismissed criticisms that mergers wipe out jobs and brushed aside warnings of an economic downturn that would leave corporations struggling under heavy debt loads.

He said the Administration fears that any effort to write laws aimed at curbing a certain kind of takeovers--such as leveraged buyouts, or takeovers financed by high-yield junk bonds--could have wide effects that would harm the economy. “We’re very concerned about overreaching proposals,” Wilkins said.

Ways and Means Chairman Dan Rostenkowski (D-Ill.) angrily accused Wilkins of backing away from the Administration’s apparent promise to work for a trade-off. “I believe you’re back to square one. I think you’re retreating.”

Many members of Congress have been considering possible techniques to discourage the borrowing of huge sums of money to carry out hostile takeovers and leveraged buyouts. In leveraged buyouts, the acquirer typically borrows huge sums for the purchase of a corporation, repaying them later through sales of assets or the company’s earnings.

Members of Congress have focused on changing the way the tax system encourages borrowing, helping to promote takeovers and buyouts, and has a bias against corporate growth that is funded through sale of stock.

All interest payments are now deductible on money borrowed to finance takeovers. By contrast, dividends paid by corporations on their shares are not a deductible business expense. And the shareholders who receive dividends must pay taxes on them.

Lectures Official

But congressional advocates of limiting takeovers have been fearful of taking any steps that might hurt economic growth or frighten investors and have been waiting for the Administration’s recommendation on legislation.

“We’ve been waiting for months for the Administration to take a position,” Rostenkowski said. “Your role is to provide tax advice to the committee,” he lectured Wilkins, who is the Treasury official responsible for tax policy.

An angry Rep. J. J. Pickle (D-Tex.) told Wilkins: “We’re waiting for a recommendation. If we can’t get one (from you), Congress will try to put a cap on these things. . . . We ought not to try to hurt business, but it is obvious something ought to be done,” he added.

While Republican members of the committee did not criticize the Administration position at Tuesday’s hearing, other members on the majority Democratic side were also clearly angry and impatient.

The volume of mergers and acquisitions has “virtually exploded” from $13 billion a year in the 1970s to more than $200 billion currently, said Rep. Byron Dorgan (D-N.D.) “At what level do you get concerned?”

Wilkins said there is “some evidence of leveling off” in the wave of takeovers. The total value of mergers and acquisitions was $227 billion last year. Preliminary figures for the first quarter suggest a total of $195 billion for this year, Wilkins said.

Wilkins insisted that “it is both difficult and dangerous to try to distinguish good debt from bad debt, good LBOs from bad LBOs, and good mergers from bad mergers using a tax policy standard.”

The “adverse effects described by many critics--particularly economic dislocations--are common to merger and acquisitions transactions generally, not just LBOs,” he said.