Don’t Blame Mitt Romney for His Tax Rate
Misplaced anger is a dangerous thing, as it prevents one from dealing directly with the root of a problem.
When our wife wanders, we go after the other guy. When our kid gets arrested for kicking a police horse, we blame that “bad influence” of a neighbor. And when we get cut from our JV baseball team, years later wewind up hurling empty whisky bottles at our son’s Little League umpire.
And when a presidential candidate reveals to the world that he paid 13.9% tax on $21,000,000 of gross income, we paint him as a tax cheat and the symbol of everything that’s wrong with the American tax system.
But don’t blame Romney. His tax return was in complete compliance with the Code. If you feel the need to be upset over what you perceive to be tax breaks for the super rich, then aim your anger at the root of the problem: the lobbyists who wage war on Congress to make sure that private equity fund managers continue to be permitted to receive profits interests in the funds they manage (commonly referred to as “carried interest”), with the resulting income largely taxed at the 15% long-term capital gains rates.
All italicized quotes are from Bloomberg:
The largest U.S. private-equity funds and venture capital firms have relied on a five-year, multimillion-dollar lobbying campaign to protect the carried interest tax break that helped drive presidential candidate Mitt Romney’s 2010 effective tax rate below 14 percent. Blackstone Group LP alone spent $5 million in 2011 lobbying Congress on issues including the tax treatment of carried interest.[KohlbergKravis Roberts & Co.] spent $150,000 in the fourth quarter on lobbyists from Akin GumpStrauss Hauer & Feld to work on issues that included tax policy. Bain spent $80,000 during the fourth quarter to hire lobbyists from Public Strategies Washington Inc. to “monitor tax reform developments,” lobbying records show.
President Obama has long been a proponent of doing away with the carried interest tax-break, maintaining that the income allocated to fund managers is properly characterized as compensation for their management services — which would be taxed at rates as high as 35% — rather than capital gains. However, any proposals to tax carried interests as compensation have met a quick death on the floor of Congress:
The last time the Senate considered a bill that would have increased taxes on carried interest — in June 2010 — every Republican voted against it, preventing the bill from advancing.
In defense of the preferential rates bestowed upon many of its industry leaders, private equity lobbyists point to the underlying nature of their activities:
“We are able to demonstrate our belief that quintessential capital gains are all about creating something out of nothing,” he said. “That’s what venture capital does.”
This much is certain, however; if the carried interest break continues, it will largely be attributable to the work of these lobbyists:
“If anything preserves the status quo, it will be the very heavy lobbying campaign,” said Edward Kleinbard, a law professor at the University of Southern California. “There’s no other reason for the subsidy to survive.”
