Romney: A Poster Boy for Carried Interest Tax Breaks
Policy + Politics

Romney: A Poster Boy for Carried Interest Tax Breaks

REUTERS/Jeff Haynes

Warren Buffett, meet Mitt Romney.

Buffet, the nation’s leading investment guru with a net worth of $39 billion, has lamented the fact that he pays an effective tax rate below that of his secretary. Mitt Romney, the overwhelming favorite to win the Republican nomination, on Tuesday estimated his effective tax rate on the income generated by his $200 million fortune is “probably closer to the 15 percent rate than anything.”

Romney came under fire during Monday night’s debate for not yet releasing his tax returns, something every presidential contender from both political parties has done for decades. He also failed to release his return in 2008 when he was challenging Arizona Sen. John McCain for the Republican nomination. President Obama paid an effective federal tax rate of  just over 26 percent on income of $1.7 million in 2010 returns, the most recent available.
Texas Gov. Rick Perry called on Romney to release his tax returns before Saturday’s South Carolina primary election, adding that it was essential for Republicans to know now because "we cannot fire our nominee in September." Perry added, "Mitt, we need for you to release your income tax so the people of this country can see how you made your money, and I think that's a fair thing."

Now Romney says he will release his returns, probably in April. “My income comes overwhelmingly from investments made in the past rather than ordinary income or rather than earned annual income,” he told reporters in South Carolina. “I got a little bit of income from my book, but I gave that all away. And then I get speaker’s fees from time to time, but not very much.”

Financial  disclosure forms that candidates are required to file annually shows that Mr. Romney earned $374,327.62 in speakers’ fees from February of 2010 to February of 2011, at an average of $41,592 per speech, according to the New York Times.

Romney’s money managers would have to be bad at their jobs if his income doesn’t soar well above $10 million a year. No doubt, reporters and the public will tear through the return for evidence of where it came from. Will there be delayed earnings from specific deals while he was at Bain Capital? If so, did those deals create jobs or cost jobs?

But more significantly, for public policy, the return could reignite the debate over the tax treatment of so-called carried interest, where the income earned by private equity managers like Romney is taxed at the 15 percent capital gains rate instead of the maximum 35 percent rate levied on personal income.

Private equity managers usually take the first 20 percent of any returns on capital as their share for managing the investment. Obama has tried to repeal this loophole in each of the budgets he submitted to Congress without success. Even the Democratically controlled Congress heard the pleadings of the private equity and hedge fund managers desperate to hold on to their preferential rates.

Those who argue carried interest should be treated like any other form of income compare it to the returns earned from intellectual property like royalties on a patent. Others compare it to the extraordinary income that accrues to any person who rises to the top of a highly paid profession like sports or the arts, who also pay at the 35 percent tax rate.

Capital gains, however, are treated differently because it is assumed it is a return on capital put at risk in productive investments, which generate jobs and income for other Americans. However they are viewed, most capital gains in the U.S. are earned by people in the wealthiest 1 percent of the population, and a growing share of U.S. income comes from earnings on invested capital (capital gains, interest and dividends) rather than from wages and salaries.

A recent Congressional Budget Office report showed that the results of unequal distribution of capital gains has been a growing inequality in distribution of income. Between 1979 and 2007, the top 1 percent of households saw their income grow by 275 percent; the next 19 percent saw their income rise 65 percent; the next 60 percent saw their income rise 40 percent; while the bottom 20 percent saw their income rise just 18 percent.