Wednesday, January 18, 2012

An unfair loophole for America’s richest

Tomorrow's editorial today:

Mitt Romney is a rich man. He has made millions from investments and business ventures, most notably the private equity firm he co-founded, Bain Capital. He has made so much, in fact, that in South Carolina this week, he described the $374,327 he was paid in speaking fees last year as “not very much.”

Good for him. Romney shouldn’t feel shame – nor should voters reflexively be wary – at the heft of his financial portfolio. But on Tuesday, the Republican candidate for president also revealed that his effective tax rate is well below what many Americans pay – “probably closer to the 15 percent rate than anything,” he said. It’s an admission that’ll intensify calls for Romney to release his income tax returns, but we don’t need his paperwork to understand how some of the wealthiest Americans have found even more riches thanks to changes in federal tax policy.

Romney acknowledged this week that most of his income comes from investments, which are taxed at a rate significantly less than the top rate of 35 percent for individual wages. That’s a product of decades of capital gains tax cuts, beginning with President Bill Clinton, who lowered that tax rate from 28 to 20 percent, followed by George W. Bush lowering it to 15 percent.

Many economists and most Republicans argue that capital gains tax cuts help rev the economy by putting more income in the pockets of people who make investments and create jobs. That’s logical but disputed. Last year, a report from the non-partisan Congressional Research Service said that reducing capital gains tax rates does little to stimulate economic growth – and ultimately is a drag on federal revenues.

Romney, however, also has benefited from an objectionable tax break – one designed to benefit hedge-fund and private equity managers. Those managers deduct a percentage – typically 20 percent – of the profits their investors make, but instead of declaring it as a fee, the managers call it investment income – or “carried interest.” That income can be taxed as a long-term capital gain at the 15 percent rate.

A New York Times report last month revealed that although Romney left Bain Capital in 1999, he still receives a share of the firm’s “carried interest” profits – taxed at the same low rate. It’s completely legal, and there’s no indication that Romney has inappropriately dodged any taxes.

But while there’s at least an arguable premise that capital gains tax cuts reward and encourage risk-taking, the carried interest loophole gives the same benefit to hedge fund and private equity managers simply for making profits off of others’ investment risks. It’s a gift for the extremely wealthy, so they can become wealthier.

President Barack Obama has proposed taxing “carried interest” at ordinary income tax rates when the Bush-era tax cuts expire in 2013, and even House majority leader Eric Cantor has entertained the possibility of scrapping the egregious loophole. While many Americans might not understand the intricacies behind “carried interest,” they know what 15 percent is – a lower tax rate than someone who makes $75,000 pays. It’s unfair. It costs the country revenue. And it’s yet another example of how America is in need of serious tax reform.

19 comments:

tarhoosier said...

Yes, I say yes, and yes.
Among the many subsidies, side bets, adjustments, deductions, credits, dodges and other tax and income shady arrangements this carried interest can make the first appearance in the Hall of Shame.

Wiley Coyote said...

Perhaps you should list every member of Congress...including thos hypocritical liberal Democrats who benefit from insider info and the same tax loopholes.

GottaBchittenme said...

Remember investment money that earns those capital gains was FORMERLY taxed as INCOME. Being taxed for the SECOND time you could say.

The Observer Editorial Board said...

GottaB,

For traditional capital gains, yes. For "carried interest," no for the manager.

Garth Vader said...

I want To see the Battens' tax return, itemized to show line-by-line which taxpayer-funded entities have paid Mrs. Batten. I'd also like Mr. Batten to release the property tax bill for his million dollar house.

jholmes44194419 said...

If/when you are a hedgefund manager....then you can get the same "loophole." What is the percentage of hedgefund managers in the US that take this tax break? Answer: less than one one thousandth of one percent. Quit whining.

Yamo said...

This whole garbage of wanting, or needing, to see his tax returns is a load of crap. Freedom and liberty also protect the rich. Do I care how much he makes? No. Dio I care that he has money in offshore accounts in the Caymans? No. Although I would rather stick a hot poker in my eye than vote for him, you have to give Romney credit for standing up for his personal liberty and business.

Ghoul said...

Garth Vader.

You mean this tax bill:

http://taxbill.co.mecklenburg.nc.us/publicwebaccess/BillDetails.aspx?BillPk=7520137

It is public information.

Wow Taylor, who knew running an editorial board on a paper that has lost 70% of its subscription base and advertisers paid so well.

Hey everyone, Taylor Batten criticizes the 1% and talks about John Edwards' two Americas and he is the 1%. What a hypocrite!

Ghoul said...

Even more hypocrisy, Taylor lives on a Cul-de-Sac.

Taylor, does Mary know about that?

kantstanzya said...

No one argues that there are problems with our tax code and that billions are wasted in tax strategies each year by individuals....including liberal icon Warren Buffet... making sure they do not give the governemnt any more of their money than necessary.

While your point is taken with the carried interest" you continue to misrepresent the reason for a lower capital gains tax. A lower capital gains tax is to encourage people to invest money and take risks with money that has already been taxed once. The 15% is on top of the 35% (or whatever corporate rate) it has probably already been taxed in a previous year.

Skippy said...

So our favorite fawning parasite ignores years of actual practice and proof that a lower captial gains tax does in fact increase revenue to the corrupt black hole that is our Govt and bodly proclaims this is bull... because of one study? Even Chairman Obamao agreed with this, but who cares. Our favorite Marxist is also on record stating he didn't care about this loss revenue, he was more concerned about "fairness". And just a few days ago, some of us learned that our class warfare President just hired a former Bain employee Jeffrey Zients to run his Office of Management and Budget, which is ironic since the Senate hasn't bothered to even pass a budget in over 1000 days.

What can't be lost in the entire tax code debate is that the Dems had no problems with one of the most corrupt tax dodgers in Congress in Charles Rangle continue to write the tax code.

At least the Tea Party has the courage to evict members their own party, but not if you are a Democrat, there is no level of corruption is too over the top for these clowns, right Taylor?

This paper is a joke.

FrankWIll said...

Nice - Ghoul. Wonder how many people know that Mr. Limo Liberal is just that. Also interesting to see the workplace dynamics - I bet Fannie and Pete are secretly envious.

Show us your taxes, Mr. Batten. Then you can judge others.

J said...

It is very disappointing to me to see what I expect to be rational, critical-thinking adults fall in line with juvenile class- and wealth-envy Democrat Party talking points. Yes, the tax code has loopholes only certain wealthy people can use. But why stop at just this one? How about the asinine requirement that companies that do business overseas pay American income taxes on top of the income taxes they pay to the countries in which the revenue was earned? What about the fact that small business owners cannot deduct their health care costs like corporations can? What about the fact that, whether small or corporate, American businesses spend tens of billions of dollars a year just to stay in compliance with the tax code? Hey, what about the fact that the entire concept of an income tax was forbidden in the original constitution and required a constitutional amendment, and was supposed to go away after the Civil War was over? The founders of this nation knew the danger of taxes like this; that's why they wrote the constitution without them. We need to stop taxing income and tax consumption instead (the FairTax).

We need to stop focusing on what "the wealthy" should or shouldn't be paying and put some real entitlement reform in place - place term limits on welfare & food stamps for able-bodied people and stop rewarding recklessness (for example, the more babies a woman has, the more welfare & food stamps she gets, with no incentive to find work and support herself). We do not have a REVENUE problem, we have a SPENDING problem.

So cut the class- and wealth-envy and spend the editorial space demanding real, genuine reform, not using tax revenue as weapons to scare and punish people.

Shark Attack said...

I don't understand how people think that being taxed on investment income is having a sum of money taxed twice. That is utterly incorrect. You only pay taxes on the profit you make from investments. Just as you can write off losses from investments.

The problem with rewarding those that are capable of investing large sums of money with a lower tax rate is that not everyone in our society is capable of taking advantage of investing in the stock market to the extent that wealthy people are.

It could make sense that the capital gains tax is set at 15% because that is the average effective tax rate most people pay on their wage income.

A flat tax that taxes all income, from jobs and investments, would be more just.

Europeanexpat said...

@Shark Attack
And where does the money for your investment come from? Mine came from my paycheck that was already taxed (I am not a hedge fund person). And you are limited in your losses write-offs

whitewall said...

There are no "unfair loopholes". There is only our tax code which is law written by Congress or findings by IRS after challenges and court cases regarding some parts of the code. These provisions are years and even decades old and are designed to encourage certain economic activities. I have used them and benefitted from them, as they are law, when I was in the real estate investment business.

Shark Attack said...

I agree that the limit on the deduction should be eliminated. I still don't agree that taxing interest/profits from an investment is double taxation.

Under that logic, companies should have to pay taxes on income because the customers purchasing that product/service have already payed taxes on that money.

Taxation is on any source of revenue. In my mind gains from investments and gains from employment are two separate sources of revenue.

DistrictSix said...

So close to the election, these vehicles to help the economy, and get people to invest large sums, becomes tax loop holes?

I must get my current copy, of the Liberal Like The Observer, today.

whitewall said...

Liberalism-Progressiveism is an ideology sold by narrative against a backdrop of increasing misery and fear. That is all the Liberal is about these days. This O-pinion is just part of the ongoing narrative and is in the tradition of divide and envy that reaches back generations across Europe and Western Asia and always ends the same: misery and death.