IN 1996 Richard Kinder was the president of Enron and the heir-apparent to Ken Lay, the energy firm’s boss. It was not to be. He was passed over for the top job, apparently judged too conservative to take the helm of America’s most innovative company. His next move, with a partner, was to buy some pipelines and a coal terminal from his former employer. Buying things that rust? It was all very old economy.

Sixteen years later the man who bested Mr Kinder to become Enron’s chief executive is in jail and that company is a byword for misleading accounting. By contrast Kinder Morgan is worth $109 billion, Mr Kinder’s personal stake approaches $9 billion and in the past year alone he has received distributions of $376m. That success is partly due to America’s energy boom and Mr Kinder’s talents; but it is also due to his shrewd use of a distinctive corporate structure.

The “master limited partnership” (MLP) combines the limited liability of a corporation, the tax advantages of a partnership and the governance of a private firm. MLPs do not pay corporate taxes so long as profits are passed on to investors each year. They also pay less attention to shareholder rights. A tidal wave of capital is washing towards these and other, similar “pass-through” structures (see this week's briefing). Together, they represent a mere 9% of the number of listed companies in America, but in 2012 they took in 28% of the equity raised on public markets and paid one-third of Wall Street fees. Add in private entities of the same type and these sorts of “corporate form” account for over two-thirds of new firms. Some industries like fracking are intertwined with them. Unnoticed, the face of American capitalism has changed.

Kinky capitalism

That should surprise no one. Time and again, the imposition of new burdens on businesses distorts the flow of money. Enron’s demise led to the Sarbanes-Oxley act, a well-intentioned law that changed the economic calculus for going public in America. Finance has yet to meet a rule it doesn’t want to game. Before the crisis, regulations that made it relatively expensive for banks to hold assets encouraged them, disastrously, to squirrel them away in off-balance-sheet vehicles.

Since the crisis, the regulatory burden on firms has shot up. Many of the new rules designed to make finance safer—raising capital levels, improving transparency in derivatives markets—are vital. Plenty are laudable: allowing “say on pay” votes for shareholders, for example. But the effect is the same: capital is again flowing to where frictions are lowest. As the constraints on regulated banks pile up, the global shadow-banking system grows: from $62 trillion in 2007 to $67 trillion in 2011.

Even when rules are rolled back, new distortions can easily result. The 2010 Dodd-Frank act permanently exempted smaller public companies from some of the most burdensome elements of Sarbanes-Oxley, for example. But some firms deliberately stay small in order not to pass thresholds that would trigger tougher rules. The perversity is breathtaking: rules to protect investors encourage firms not to grow.

It is a similar story when it comes to tax. Fifty years ago, a tax to discourage Americans from investing in foreign securities spawned the Eurobond market and launched London’s rise as a financial centre. Now, as rich-world countries huff and puff about offshore tax avoidance, American firms are using corporate structures to minimise their tax bills in plain sight at home. Private-equity firms are among the most adept at playing the tax game: their listed arms use MLP-style structures to sidestep corporate taxes and their executives pay inappropriately low capital-gains tax on their investment profits.

A question of equity

It would be easy to turn this into a morality play about rule-dodging capitalism. That is too simplistic. The rise of listed partnerships and other corporate forms is neither all good nor all bad. MLPs have raised capital quickly for the reconstruction of America’s energy industry; business-development companies (BDCs), another pass-through structure, provide credit to businesses that banks have abandoned; real estate investment trusts (REITs) have helped people manage property portfolios. The need to distribute profits means that these firms are constantly inhaling and exhaling capital rather than storing up cash: market discipline is constantly applied as a result. There is room for competition among corporate structures. Anything that breathes life into listed markets is welcome.

And yet these firms are also troubling to anyone who cares about capitalism. The primary advantage of these structures is that they minimise tax payments. The exemptions that are enabling more firms to become MLPs, BDCs or REITs depend on lobbying. The quirks of tax rules impede mutual funds and many others from investing; they tend to be vehicles for very rich investors. The flow of money out of the companies means that they are difficult to analyse like normal corporations.

When the flow of money is driven by the advantages of corporate forms as much as the businesses inside them, the stockmarket is efficient in only the narrowest of senses. And when the most advantageous investments are denied to large swathes of America, the markets are not truly public.

Policymakers ought to be seeking to end these perversities in two ways. The first is to drive down the corporate-tax rate, as a way of dampening the distortions caused by listed partnerships’ tax advantage. America’s tax rate is higher than others in the rich world (one reason why these structures are less widespread in Europe). This newspaper has argued before that it is better directly to tax investors, workers and consumers.

Second, the regulatory burden on all America’s listed firms should be loosened. Politicians have already recognised the damage that regulation can do to the vibrancy of equity markets: hence the looser listing requirements for “emerging growth companies” (Twitter among them) under the year-old JOBS act. Rather than creating more tiers of firms, with all the odd incentives that entails, better to lighten the rules for everyone. American capitalism is one of the most dynamic forces on the planet; it is better when it is conducted in the open.