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Romney’s Taxes Show Ridiculousness of Carried Interest Loophole

Mitt's tax forms say he doesn't have to work to become richer (photo: Gage Skidmore)

Mitt Romney released his tax returns for 2010 and an estimate for 2011 today, and I think what we can say about them is that Mitt Romney, or rather his accountant, is very good at taxes.

Nobody suggests that anything on Romney’s tax form reflects any illegal activity. Rather, he’s working within the bounds of the law, taking advantage of the immense largesse and tax favorability our government bestows on rich people.

Ed Kleinbard, a USC professor and former chief of staff for the Joint Committee on Taxation, the tax-based complement to the Congressional Budget Office, appeared on a DNC conference call today to discuss the Romney tax release, and he gave the best explanation of the schemes that investment-heavy taxpayers use to lower their tax burden, making his effective tax rate 13.9%. First of all, Romney carried over prior losses into 2010 to reduce his adjusted gross income. This is a typical strategy of taking the losses and extending out the gains, so that the AGI doesn’t really reflect the economic income of a particular year. Romney also appeared to use tax havens for some of his money, though the status changed in 2010 and those shelters were disclosed. And we don’t know anything in this tax release about Romney’s $100 million IRA, which he may have used to get out of paying the unrelated business income tax (UBIT).

But Kleinbard delivered the best description I’ve seen of carried interest, which plays a major role in Romney’s tax strategy. First of all, Romney still benefits from new carried interest on his 2010 form, ten years after he left Bain Capital. One part of the form obligates Romney to perform “services” for Bain as a consequence of receiving this money, which needs to be explored more. But Kleinbard described carried interest this way: basically, carried interest refers to management fees that money managers receive for dealing with someone else’s money. That gets taxed at the capital gains rate, 15%, rather than the higher income tax rate of 35% at the top margin. To the extent that a lower capital gains tax can get justified at all, it’s as an encouragement for investment. But giving that tax break to the money manager encourages no investment at all. The money would get invested either way, as it has no bearing on the tax advantage of the investor. The money manager is just getting a break, and a giant one at that.

“How can Mitt Romney separate his own tax strategy with what is good for the country going forward,” Kleinbard asked. And it’s a good question. I would hasten to add, however, that the carried interest rule has been in place throughout the Obama Presidency, and while in the 2009-2010 period, including portions when Democrats held 60 Senate seats, Congress flirted with but ultimately did not change those rules. And Democratic Senators like Chuck Schumer, John Kerry and Maria Cantwell led the way in blocking any change to those rules.

This is a bipartisan problem. The tax code advantages rich people with smart accountants who know their way through the loopholes. In many instances the same rich people hired the lobbyists who wrote the loopholes. So while Presidential leadership matters here, it’s a much bigger problem.

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Romney’s Taxes Show Ridiculousness of Carried Interest Loophole

Mitt Romney released his tax returns for 2010 and an estimate for 2011 today, and I think what we can say about them is that Mitt Romney, or rather his accountant, is very good at taxes. Nobody suggests that anything on Romney’s tax form reflects any illegal activity. Rather, he’s working within the bounds of the law, taking advantage of the immense largesse and tax favorability our government bestows on rich people.

Ed Kleinbard, a USC professor and former chief of staff for the Joint Committee on Taxation, the tax-based complement to the Congressional Budget Office, appeared on a DNC conference call today to discuss the Romney tax release, and he gave the best explanation of the schemes that investment-heavy taxpayers use to lower their tax burden, making his effective tax rate 13.9%. First of all, Romney carried over prior losses into 2010 to reduce his adjusted gross income. This is a typical strategy of taking the losses and extending out the gains, so that the AGI doesn’t really reflect the economic income of a particular year. Romney also appeared to use tax havens for some of his money, though the status changed in 2010 and those shelters were disclosed. And we don’t know anything in this tax release about Romney’s $100 million IRA, which he may have used to get out of paying the unrelated business income tax (UBIT).

But Kleinbard delivered the best description I’ve seen of carried interest, which plays a major role in Romney’s tax strategy. First of all, Romney still benefits from new carried interest on his 2010 form, ten years after he left Bain Capital. One part of the form obligates Romney to perform “services” for Bain as a consequence of receiving this money, which needs to be explored more. But Kleinbard described carried interest this way: basically, carried interest refers to management fees that money managers receive for dealing with someone else’s money. That gets taxed at the capital gains rate, 15%, rather than the higher income tax rate of 35% at the top margin. To the extent that a lower capital gains tax can get justified at all, it’s as an encouragement for investment. But giving that tax break to the money manager encourages no investment at all. The money would get invested either way, as it has no bearing on the tax advantage of the investor. The money manager is just getting a break, and a giant one at that.

“How can Mitt Romney separate his own tax strategy with what is good for the country going forward,” Kleinbard asked. And it’s a good question. I would hasten to add, however, that the carried interest rule has been in place throughout the Obama Presidency, and while in the 2009-2010 period, including portions when Democrats held 60 Senate seats, Congress flirted with but ultimately did not change those rules. And Democratic Senators like Chuck Schumer, John Kerry and Maria Cantwell led the way in blocking any change to those rules.

This is a bipartisan problem. The tax code advantages rich people with smart accountants who know their way through the loopholes. In many instances the same rich people hired the lobbyists who wrote the loopholes. So while Presidential leadership matters here, it’s a much bigger problem.

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David Dayen

David Dayen