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.