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Dems decry Romney's tax 'loophole'

The GOP candidate's 13.9% rate draws attention to a tax break for investment execs that taxes profits at the capital gains rate of 15% rather than the regular rate of up to 35%.

By MSN Money Partner Jan 24, 2012 3:32PM

This post is by David J. Lynch and Steven Sloan of Bloomberg. release of former Massachusetts Gov. Mitt Romney’s 2010 tax return may inflame the controversy over the tax code’s treatment of some of the nation’s richest individuals.


Romney, who made a fortune of as much as $250 million in the private equity industry, paid an effective tax rate of 13.9% on income of $21.6 million in 2010. That compares with the 35% top marginal tax rate.


The Obama administration and congressional Democrats are seeking to benefit from debate over the so-called carried interest provision, which provides a relative handful of investment executives with preferential tax rates. President Barack Obama views the tax break as a "loophole" that is "just not fair," White House Press Secretary Jay Carney said last week.


At issue is the U.S. tax code’s treatment of carried interest, or the share of profits that partners in private equity firms, hedge funds and real estate developments receive as the bulk of their compensation. That income is taxed at the 15% capital gains rate rather than at ordinary income rates of as much as 35%, although many tax specialists say it represents compensation for labor.


Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said the influence of carried interest on Romney’s tax bill "further illustrates the need to address this issue once and for all."

"Regardless of whether compensation is earned for managing investments of other people’s money or providing other types of services, it should be taxed at the same rates paid by everyone else in the U.S.," he said in a statement. Levin said he plans to reintroduce legislation that would tax carried interest at ordinary income rates.


The opening round of a renewed effort to tax such carried interest as ordinary income may come as soon as Tuesday night’s State of the Union address, expected to revolve around a theme of "economic fairness."


For Obama and congressional Democrats, the issue’s appeal is more symbolic than substantive. There is almost no chance that a divided Congress this year would raise the tax rates that apply to such income. The notion that some of the nation’s richest individuals pay tax rates that are lower than what millions of typical Americans pay, however, dovetails with rising public concern about the gap between rich and poor.


Sharp Conflict


A Pew Research Center poll earlier this month found that 66% of Americans saw a sharp conflict between rich and poor, up from 47% in 2009. The largest increase in such sentiments was among self-described independent voters.


Warren Buffett, chairman and chief executive of Berkshire Hathaway and an outspoken supporter of the president, criticized the tax system again Monday for touching the wealthy so lightly.


"It’s the wrong policy to have," Buffett told Bloomberg Television’s Betty Liu in an interview. Romney is "not going to pay more than the law requires, and I don’t fault him for that in the least. But I do fault a law that allows him and me earning enormous sums to pay overall federal taxes at a rate that’s about half what the average person in my office pays."


Payroll Tax Cut


Rep. Chris Van Hollen of Maryland, the senior Democrat on the House Budget Committee, said last week that the carried interest tax break should be eliminated and the resulting revenue used to fund the administration’s proposal to extend the payroll tax cut for workers.


"These are people who are not putting their own capital at risk," Van Hollen said. "They’re not putting their own dollars in the mix. They’re getting a special deal that’s not available to other people in the economy."


The Private Equity Growth Capital Council, an industry group, says carried interest is "fundamentally different in character" from regular wages. If such income were taxed at regular rates, private equity investment could decline by $7.7 billion to $27 billion a year, according to a 2010 study by the council.


Private equity firms, including Romney’s former firm Bain Capital, usually put up a thin slice of a buyout fund’s capital. For example, Bain invested just $3.5 million, or 0.1%, of the $3.5 billion Bain Capital Fund VIII launched in 2004. The company is scheduled to receive 30% of the fund’s profits once investors get their initial capital back, according to copies of the fund’s financial statements obtained by Bloomberg News.


Management Fee


Private equity firms also receive a 2% management fee, which is taxed as ordinary income.


Seeking to change the tax treatment of carried interest has risks for the Democrats. Brian Gardner, senior vice president for Washington research at KBW, said the party’s strategy could backfire.


"There are Democrats that are close to and supportive of private equity and venture capital -- Bay Area Democrats, Silicon Valley Democrats," he said. "It’s more complicated than people appreciate."


Sen. Charles Schumer, a New York Democrat, has been in the middle of the policy debate that pits his party’s message against the interests of some of his constituents. In 2007, Schumer opposed tax measures that singled out carried interest compensation at private equity firms or hedge funds.


Broader Range


In a later move that doomed legislation changing the tax treatment of carried interest, he backed a measure that would have affected a broader range of businesses, including oil and gas, venture capital and real estate partnerships.


Rep. Kevin Brady, a Texas Republican who sits on the Ways and Means Committee, called the Democratic focus on carried interest "a political gimmick" with "zero chance" of passage.


"Make no mistake: Most of that provision doesn’t hit those giant hedge funds," Brady said in an interview. "It’s traditional real estate partnerships that build our office buildings, shopping centers and movie theaters and industrial parks."


Between 2007 and 2010, the Democratic-controlled House passed legislation that would have taxed some or all carried interest at ordinary rates. Treating carried interest as ordinary income would generate almost $31 billion in revenue over 10 years for the Treasury, according to a 2008 estimate by the congressional Joint Committee on Taxation.


Half of Carried Interest


A narrower proposal that was passed by the House in 2010 -- and would have initially taxed half of carried interest compensation as ordinary income -- was estimated to generate $17.7 billion over the period.


Though lawmakers have debated the tax treatment of carried interest for years, the attention on Romney’s tax bill could capture the public’s attention, said Richard Pomp, a professor at the University of Connecticut School of Law in Hartford.


"The issue has been kick-started," he said. "People will understand it in a way they never understood it before."


More from Bloomberg and MSN Money:


Jan 25, 2012 11:11PM

@Integrity1 .. .I pay at a higher rate than Romney .. .but then, I didn't give a huge amount of money to church and charities either.  Yes, carried interest is an indefensible part of the tax code .. . Created by Congress .. not Romney ... Congress,l on both sides of the aisle have used the tax code as means for social engineering and to grant favors for years .. .there is no one to blame but them.  I paid every dollar I legally owed but not a dollar more ... I am sure Romney did likewise ... so, condemn the tax code and I will join you, condemn Romney for only paying what he legally owed, and we part ways on the issue.

Jan 24, 2012 8:16PM
Typical Dems hypocrisy....let's take a look at some of their tax returns.
Jan 24, 2012 5:54PM
This is typical democrat party mumbo jumbo in the mistaken belief that the American public is populated by a bunch of know nothing buffoons who can not understand complex problems. It will probably sway a few, but the real truth is that we are much more intelligent than the democrat party gives us credit for.
Jan 25, 2012 7:49AM
No mention of the 16.4% of his income that went to charity.
Yeah, 3.5 million dollars.
Jan 25, 2012 8:24AM
If you don't like the 1%, then don't vote for them.  Obama, Gingrich, Romney, Paul and 432 senators and congressmen who write laws for themselves, their friends and the corporate checkbooks that are financing the campaigns.  The corporate funds (super PACS) financing this campaign could employee 100,000 people by the end of 2012 instead of 434 "privileged" individuals.
Jan 24, 2012 7:52PM

Someone – I said nothing about Romney's personal tax situation.  As far as I know, Romney's income in recent years came from investments and not from being a partner in a private equity firm. Therefore, he's entitled to capital gains rates like everyone else.


Yes, private equity partners have successfully argued that their compensation is merely a share of profits. Their compensation is based on the profits made but unless their money was at risk, it was not a share of profits. Consider this....a lawyer takes a case based on a contingency. His/her client wins a tax-free compensation. The lawyer can't claim that his/her percentage is tax­ free. It's compensation for services and taxes are paid on the lawyer's profits. And that's how private equity firm profits should be taxed....except on the distribution based its own investment.


The company is scheduled to receive 30% of the fund’s profits once investors get their initial capital back, according to copies of the fund’s financial statements obtained by Bloomberg News.


Now what happens if the investors do not get their initial capital back? As an investor who has not gotten all my initial capital back it is lost money. There is risk associated with investing and the higher the risk the higher the possible return. On the flip side the higher the risk the higher the possible lost. Why is it we seem to always hear about the winners?  Somewhat like how many guys want to be NFL Players and how many actually play.

Jan 24, 2012 6:33PM
To retiredwonk: Romney true tax rate:  Gross up his investment income by the corporate tax rate that is first paid on the investment money and then multiply by 35% add that to his taxes he is paying personally.  His investment rate of return is halved by taxes.  Carrie interest is no compensation but a share of profits to be earned only if the investment being managed is a success.  So it is a return on investment and not earned compensation
Jan 26, 2012 10:35AM

OK, so Romney only paid 15%. He followed the IRS code/law. You may not like it, but that is just how it works. As long as the mega rich make the rules that is the way it will stay.

This just underscores the need for the FLAT TAX! Then ALL will pay the same -- rich or poor!

Jan 24, 2012 6:22PM
This "carried interest" provision seems bizarre.  If private equity partners have their own money invested, then they should be taxed at capital gains rates.  If they are being compensated for investing other people's money, they should be taxed like everyone else's salary.  Actually, I'm not a big fan of capital gains rates as it shows the Government favors investing money over manual labor.  Actually, the Government favors investment income made outside of 401k funds over investment income from 401k funds as the later are taxed as ordinary income when withdrawn.
Jan 25, 2012 12:39PM
He could have lost the same amount or more! How much are the people making on a CD? He is paying his fair share but no vote from me.
Jan 25, 2012 2:39PM

Anyone that signed the NO TAX PLEDGE has given up their right to hold office.

They are elected to do their best for this country by using their best judgment.

Norquist was not elected.  

Jan 29, 2012 12:51PM

It is a sad day when someone is so envious of some else's wealth!!! Bone up--- get another job or two, work 80-100 hours a week to build a business.


Funny, the people that complain the most are the one's paying ZERO NET FEDERAL TAXES!!

Jan 26, 2012 1:13PM
Every body in America that pays taxes, pays as little as they can possibly get away with. Don't blame Romney for being an American.
Jan 27, 2012 7:41PM
You would think you'd be taxed less for working 40 hours/week then someone who just sits there collecting money though interest? How come there is a high interest rate for winning sweepstakes or lottery? I think i paid a higher % for owning a car (personal property tax) in MO!
Jan 27, 2012 1:34AM
"Dems decry Romney's tax loophole."

I get annoyed with anyone in the government, especially the Democrats as of late, complaining about a person or business using a "loophole". Was it a loophole that Geithner (a Democrat) was using when he didn't do his taxes properly? No. He blamed Turbotax (hey, if you're not smart enough to use turbotax, do I really want you running the treasury?) Was it a loophole that Rangel (a Democrat) used to cheat on his taxes? No. His excuse was that he didn't fully understand the tax laws. This is the guy who was the chairman of the House Ways and Means Commitee... they WRITE the tax laws. If the chairman of the commitee "can't understand" the tax laws, maybe we need to fix the laws. It's obvious that we needed to replace the chairman. I'm sure there are more example, and probably some Republican examples, but these were the two highest profile examples... because of their position... that we have had in the past few years, of people incorrectly doing their taxes.


Why is it the government writes laws with a benefit in it, whether they call it a deduction, exclusion, exemption or whatever (if you notice, they never write in a loophole), but when someone uses that law, someone they didn't intend it for, they call it a "loophole". Maybe we just need smarter people writing the laws in congress.

Feb 7, 2012 3:10PM

The second paragraph tells you this is going to be an utter waiste of your time.  Comparing someone's effective tax rate to the highest marginal tax rate.  Never mind the fact that people whose income put them in the 35% marginal tax bracket  don't pay 35% of their income in taxes either.  If you don't like that investment income is taxed differently than employee income that is fine lets change that but why waist our time reading or writing bull$h1t like this?


You could make $400billion a year and you would not pay 35% of your income in taxes.  That just isn't how our taxes work.

Jan 25, 2012 12:28PM

Capital gains taxes are not  “earned income”  ; those dollars are more easily gained and taxed less but they have the same buying power as earned income dollars.  Why should they be taxed at a lower rate?  The simple reason is because the people who made the law had a lot of capital gain income, so they passed laws favoring their income.  This is why Romney’s effective tax rate is so outrageous to me and many others.  He charges way more than others for his time/effort, takes advantage of every break he can get on taxes and ends up with hundreds of millions of dollars while those affected by his actions go to the poor house.


It is mainly the 1% who can take advantage of capital gains and all the other loopholes which reduce the amount they pay to help run the government of this country which has helped them make their fortunes. Those who benefit greatly should pay greatly (and gratefully).


Capital gains rates should be higher & progressive, as they have been in the past.


A total overhaul of the Federal Tax Code would be ok with me, but that process should be well thought through and not a hastily made.  Those with the money are still the ones who will have to pay - with their money, power and influence they have reduced half the country to poverty, subsistence living with no discretionary income to invest and take advantage of "capital gains" and the myriad of other tax loopholes.

Jan 25, 2012 2:35PM
Capital gains should be progressive with deductions for investing to create jobs in this country period!
Jan 24, 2012 6:37PM
sounds like an entitlement on a grand  scale
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