There is a good reason why equity capital firms such as Bain have flourished in more recent years. Their business model depends on three specific tax breaks, and without them, they are much less attractive to investors.
In short, Bain and other equity capital firms are simply tax arbitrageurs. The tax breaks are:
1. Debt interest tax-deductibility. Contrary to popular belief, equity capital firms do not "rescue struggling companies." Their ideal targets are slow growth, long-established "cash cow" businesses (I worked for one taken over for this reason). Cash cows are undervalued in the market, where aggressive growth at all costs is the paramount indicator of worth. Smaller, family-run firms with low debt, who trade growth for stability and community commitment, are ripe targets, ready to be "milked."
Basic college finance classes demonstrate how a new owner can issue dangerously-high levels of debt to finance the purchase, use the operating cash to pay the interest, and take a tax deduction worth up to millions of dollars annually. The risk of default in bad times will sink the company eventually, but the equity capital firm tries to "flip" it before then.
2. Capital gains tax rate differentials. In 2003, the long-term capital gains rate was shaved by 20% for high-income earners (from 35% to 15%). The goal of an equity capital firm like Bain is to turn "ordinary income" from the "cash cows" into "capital gains income." Instant 20% savings on taxes!
3. Carried interest. This is a very fake term for what other businesses call a "management performance bonus." Since normal management bonuses are taxed at the regular rate, lobbyists invented this new form of "income" and got it taxed at 15%. Again a 20% tax savings!
It has recently been revealed that Mitt Romney is still receiving millions of dollars in income from Bain in "carried interest." Oh I forgot. Mitt says he is "unemployed."
If these three tax breaks were to disappear, the Bain business model starts to collapse. Even the tax deductibility of interest on business debt is, according to many tax and finance experts, simply a government subsidy of debt capital over corporate stock, and overall puts too many companies in a high-default-risk state.
UPDATE: Commenter nextstep correctly notes that the drop in capital gains rates began in 1998 under President Clinton, going from 28% to 20%. The point still remains, however, that there is now a 20% differential between ordinary income and capital gains income. The opportunities for tax arbitrage are massive, often exceeding booked profits.