The recent release of Mitt Romney’s tax returns revealed that not only does he not work for his current income but that he makes a cool $20 million a year. Furthermore, the news of his “effective tax rate” being 13.9% brought some pundits to their knees and rendered many people speechless.
How is it possible that Romney made $43 million dollars in the two previous years but paid around the same tax rate that a household earning $80,000 a year paid? It turns out Romney was paying what he legally had to in taxes, but perhaps not what was fair.
Romney took advantage of a little known tax loophole called the “carried interest rule” that allows hedge fund and private equity managers to be taxed at the lower (15 percent) long-term capital gains rate (money held for at least 365 days or more) instead of the much higher normal income rate (35percent).
While Romney is no longer working with Bain Capital he is still collecting investment income from them based on deals he did with them over a decade ago. To be clear, Romney’s income is not based entirely or even largely on these previous Bain deals, but the fact that the income/money he receives from the Bain deals is taxed at around 15 percent makes many people uneasy or raving mad in some cases.
Bain Capital made/makes money by essentially taking over distressed companies and then dismantling them in order to make a profit off of them, regardless of the cost to individual employees. In many instances these private equity or leveraged buy-out firms plunk down a small percentage of the cost of buying a company and then leverage or borrow for the remainder. However, “the debt goes onto the books of the target company, not the private equity firm.” To make a long story short, Bain and other similar companies take large management fees and twenty percent of the fund/company’s profit.
Romney is still receiving income from these exact types of deals and paying the much lower tax rate thanks to the carried interest rule. Whether or not the carried interest rule should be done away with or not is one discussion, but whether or not long-term capital gains tax rates should be increased is another.
Remember that anyone can take advantage of the long-term capital gains tax rate of 15 percent. You don’t have to worth several hundred million dollars like Romney, but can simply open up a mutual fund, buy stocks or real estate and when you sell those assets for a profit you will only have to pay the 15 percent rate on the profit you made.
The thorn in the side of so many is that Romney, and other leveraged buy-out kings like him, are able to receive what is essentially income but pay twenty percent less in taxes than they wood if that money was counted as ordinary income. Taking it a step further is the massive lobbying efforts put forth by Bain and other private equity firms over the years to ensure the carried interest rule is not changed. Amazingly, the average household cannot afford expensive lobbyists to sway the votes of influential Senators, such as Charles E. Schumer, Democrat of New York.
The general consensus from the average person who understands and knows about the carried interest rule is that it be abolished. After all, does Romney really need that extra few million dollars or is his already two hundred million or so sufficient for his survival?
However, whether or not the long-term capital gains tax rate should be raised from 15 to 20 or even as high as 30 percent is a separate much more touchy issue. After all, anyone can benefit from the lower capital gains tax, therefore wouldn’t raising it be detrimental to everyone else?
Would you like to see the capital gains tax increased and to what level? Do you think the carried interest rule should be erased?