Opinion

David Cay Johnston

The burden of Romney’s tax returns

By David Cay Johnston
January 20, 2012

A tax return says a lot about a man, especially one aspiring to be president.

If Mitt Romney makes good on his promise during Thursday night’s Republican candidates’ debate to release “multiple years” of his returns, it will likely stir up rather than calm the political storm unless he makes public all of his returns from 1984 through 1999. Those are the years when he built a fortune of more than $200 million while running Bain Capital Management.

There’s no suspicion that Romney has done anything illegal. But what should be secret about the taxpaying relationship between a presidential hopeful and his government?

Romney himself said late on Thursday: “I’m not going to apologize for being successful.”

The former Massachusetts governor disclosed this week that he pays about 15 percent of his income in federal income taxes. That’s the same effective tax rate as a single wage earner making $60,000. Most of Romney’s income consists of dividends and capital gains, which Congress taxes at 15 percent. Were his income in wages, he would have paid a much higher rate.

Congress requires that most workers have income taxes withheld from their pay, but not so investment partnership managers like Romney, who cofounded Bain Capital Management and ran it for 15 years. They can earn compensation now and pay taxes later, decades later if they want. It’s called “carried interest.”

At the debate Romney wouldn’t say just how many years of returns he would make public. He has yet to share any of them. Before Thursday night, he had spoken only of releasing returns come April, the 2011 tax deadline. He came under public pressure to deliver more.

Unless he releases the tax returns from his Bain Capital years he will surely be pressed about how much, if any, of his fortune has yet to be taxed and how long he deferred paying on the portion that has been taxed. He will be asked about Bain accounts in the Cayman Islands, Bermuda and other tax havens. While perfectly legal, these offshore accounts convey an unsavory political whiff to many people, including some of his rivals for the Republican presidential nomination.

And what about taxes on the $100 million that Romney put into a trust for his five sons. How much Massachusetts and federal income tax, as well as gift tax, was paid on that money?

None of these questions can be answered without the returns from his Bain years.

MANY HAPPY RETURNS

Romney’s political problems could multiply once families around kitchen tables grasp the fact that while they pay taxes before getting paid, Romney arranged to delay paying his for years. The disclosures could also lead to popular support for ending such deferrals, which President Barack Obama, a Democrat, proposed in 2008 and again in September. Hedge fund and private equity firms have spent a lot of money on lobbying and campaign donations to avert any such change.

Newt Gingrich, a rival for the Republican nomination, released his own tax returns on Thursday to try to embarrass Romney. Gingrich has warned Republicans that Obama’s campaign in the run-up to November’s elections will hammer these tax issues if Romney is nominated. For sure, the Obama campaign would also hammer Romney over any refusal to disclose the full story of his income and taxes going back to 1984. A no-win situation for Romney? Maybe not.

There are presidential precedents that strongly favor disclosure. In March 2008 Obama released his returns from 2000 forward. In 1999 George W. Bush released his 1998 tax return showing how he made $17 million in carried interest from the Texas Rangers baseball deal he managed.

The practice of releasing returns even predates the revelation during Watergate that President Richard Nixon filed four fraudulent tax returns, resulting in felony indictments of two of his tax advisers.

Back in 1968, another Republican businessman seeking his party’s presidential nomination disclosed 12 years of tax returns. That man was George Romney, Mitt’s father, who said it was the right thing to do.

PHOTO: U.S. Republican presidential candidate and former Massachusetts Governor Mitt Romney and his wife Ann relax while on the campaign bus as they leave a campaign stop in Gilbert, South Carolina, January 20, 2012. REUTERS/Jim Young

Comments
27 comments so far | RSS Comments RSS

“…once families around kitchen tables grasp the fact that while they pay taxes before getting paid, Romney arranged to delay paying his for years. The disclosures could also lead to popular support for ending such deferrals…”

Hopefully, this will at long last open the eyes of the Reagan Democrats and working and middle class Republicans to how the deck has been stacked against them for nearly 40 years.

When they’re thinking about this they also need to consider that Social Security FICA taxes are capped at $110,000. This means that Mitt, his banker and Wall Street friends, actors, entertainers, athletes and college coaches only pay into Social Security on $110,000 of their wages.

What do they pay into SS when your income is carried interest? Nothing?

The working and middle class people earning UNDER $110,00 pay on 100% of their wages. What’s the percentage when you make $1 million or $20 million? That’s a pretty amazing tax break right there, isn’t it?

Eliminate the FICA cap. Everybody pay on 100% of their income.

Posted by emm305 | Report as abusive
 

Deceit does not do high income earners any favors, because it is easily seen in the “income tax” canard.

First, in almost everyone’s eyes there is no difference between income tax (i.e. taxes on income) and Federal Income Tax. This is a deceit. It enables statements such as “the rich pay most of the Income Taxes”, where the speaker knows that the following is certainly not true — “the rich pay most of the Federal taxes on income”. The difference is a lie, intended to deceive to the detriment of the listener and the gain of the speaker.

Most American households are dependent on wages. Wages are subject to the broadest Federal tax on income, so-called FICA taxes. FICA taxes are not tax deductible but are paid with after Income Tax dollars. The FICA tax rate is 6.4% each for both employer and employee, or 12.8% combined or self-employed. Add to that 1.2% medicare tax paid by the employee and you get 14%, in after tax dollars. If the employee is in a 15% Income Tax bracket, which is quite low, the burdened taxes on income are the sum of (.14 / .85) + .15 = 30.47%. That is a lot more than 15%.

FICA taxes, which are levied only upon wage income below $110,000. only, account for 36% of Federal Revenue. All Income Taxes account for only 45% of revenue. Wage earners pay both taxes. The wealthy rarely pay FICA taxes of any amount.

Very few working families pay 15% or less because FICA alone for most wage earners is 16.5% figured after tax, or more. Plus “Income Tax”.

It is very difficult to find a credible motive for this constant drumbeat of deceit other than intentional dishonesty.

Posted by txgadfly | Report as abusive
 

I see two things (at least) missing from this discussion.

One, Mr. Romney and other extremely wealthy people could not have created their wealth without massive taxpayer funded investments in infrastructure, for example, courthouses and jails (and their staffs) to enforce legal contracts. Or water and sewage systems to live. As a society, it is impossible to pay for a first-world infrastructure on the backs of people making less than six figures. We apparently have a three trillion dollar infrastructure spending backlog for the past three decades that directly or indirectly ties back to the de-taxation of extreme wealth.

People like Mr. Romney don’t pay taxes because it’s a nice thing to do. They must pay obscene tax rates to re-fund the infrastructure that made their wealth possible in the first place (and makes wealth possible for our kids). We cannot have a viable economy without massive taxation on extreme wealth, although you can debate what tax rate and what amount is “extreme.”

Second, aside from de-taxation of extreme wealth and de-regulation (e.g. endless mergers), the third part of the Reagan agenda is wage suppression. If you suppress wages, and productivity rises, the extra money can be sucked up by management and investors. As it has now for three decades. From 1945 to around 1980, for example, all income groups in the US doubled their incomes. From 1980 on, the top 1% increased their incomes 200%+ and the top .1% increased income 400%+. Meanwhile everyone else, the 99%, saw 0-60% increases in income.

The minimum wage, for example, should be tied to inflation. If it had from the beginning, the minimum wage would be around $16-18 an hour ($32,000 to $36,000 a year). Our society would have easily absorbed that level of wages (and probably still could if we were to reset the wage). The minimum wage sets the floor for wages across the entire economy. It’s telling, too, that every business cost except the minimum wage have been allowed to increase in the past three decades. Why not wages?

Add in the jump in CEO pay (apparently 6 or 7 out of 10 in the top .1% are public company CEOs and senior managers) relative to the lowest salary in their companies, offshoring of jobs, endless mergers, union busting, and refusing to let the minimum wage keep up with inflation, you get a society that cannot sustain an economy. You get depressed consumer spending. The extremely wealthy speculate, create bubbles, and cause lots of needless and preventable economic devastation.

In short, Mr. Romney’s taxes are important for many reasons beyond the public’s right to know. He’s a poster boy for what is wrong with this country, and how we got here. Our discussion should be much wider than simply whether or not a 15% tax rate is fair.

Posted by FredFlintstone | Report as abusive
 

You state, “Most of Romney’s income consists of dividends and capital gains, which Congress taxes at 15 percent. Were his income in wages, he would have paid a much higher rate.”

ALL the other issues in your article are totally meaningless in terms of this basic inequity in the US tax laws, since this issue is the crux of this particular problem.

The reason “unearned income” is taxed at a much lower rate is because the wealthy have the requisite clout to have appropriate legislation passed to ensure the main portion of their income is taxed at a rate much lower than it should be if he had earned it from running a business.

THAT IS WRONG!

Why?

Because it carves out a special loophole through which the wealthy are able to avoid paying their “fair share” of income taxes.

It is a classic example of what is wrong with our tax system — it is riddled with loopholes for the wealthy to avoid paying their fair share of taxes.

As a result, the extra burden for their failure to pay their fair share in income taxes falls squarely on the middle class.

And now they have the gaul to refuse to pay even that amount of “watered down” income taxes, thanks to the Bush tax cuts — which they managed to ram through for themselves, and now want to make permanent.

Want to know what’s wrong with this country?

“It’s the wealthy, stupid!”

PseudoTurtle
CPA/MBA

Posted by Gordon2352 | Report as abusive
 

Now, I have heard the comments from you who don’t understand the tax system. If you don’t work for someone else, “you work for yourself”, you pay quarterlies and then if you don’t have enough in the pot, come tax time, you pay a penalty. I hear none of you commentors, nor the writer making any claims about jobs you have created, or any money you have risked to found a company. I think all you reporters who are squacking about tax returns should show your returns along with what your deductions are. Social security is available for those who paid into the system. There are a lot of ex Government employees who are double dipping, but thats another problem.

Posted by fred5407 | Report as abusive
 

putting aside the carried interest nonsense, can you imagine working hard all your adult life to build a business and going to your bank to borrow the value of the business to pay yourself a dividend and then selling the business? your banker would laugh at you but mitt goes to his wall street buddies and makes it happen! the chances of survival of that business is now questionable, but mitt and the boys make out like bandits! that’s not capitalism!!!!

Posted by repubsrcrazy | Report as abusive
 

It is depressing that nobody – even seemingly educated commentators, understand that capital gains tax is essentially double taxation. Add to insult, it’s not just a Federal tax, but also a State tax because most states also levy a tax on capital gains and dividends. In my state of New Jersey I pay the 15% Federal tax + 10% New Jersey tax.

The depressing part is that I already paid Federal, State, FICA, SUI, etc. taxes on the money that earned me the dividends. When I take out dividends or cash in on some of the gains, I get taxed again!

As an example, take a middle class retiree who earned $50,000 per year and paid Federal, State and other taxes on it. Every year he took some of that AFTER TAX money and invested it in a stock fund. The fund grew nicely and now the retiree starts cashing in on his investment’s gain – and pays ANOTHER 15% Federal + ANOTHER 10% state tax on the gain. Why would anyone insist that he pays another 30% Federal tax on it?

This is the situation Romney is in. Why doesn’t anyone highlight this double taxation? Actually a large part of Gingrich’ income also come from dividends.

Posted by Oppieknoppie | Report as abusive
 

When I take my hard-earned AFTER TAX money and found a company, thereby riskinbg everything, I should not have to pay ANOTHER 15% federal and 10% state tax on the gains. It is totally unfair.

Posted by Oppieknoppie | Report as abusive
 

@ FredFlintstone, in other columns and my books I have written extensively about the infrastructure and related issues you raise.

@Gordon2352, the carried interest issue does not apply to all of the wealthy, just organizers of certain investment funds. Carried interest is compensation for services, but Congress allows these interests to be treated as capital gains even though the manager has only a profits interest in return for his labor. This makes the 15% rate in carried interests a significantly different issue than capital gains rates per se because the manager does not have capital at risk, the clients do. People who disagree with this view mostly acknowledge carried interest is compensation for services, but contend the investment managers have so much market power they would extract higher profit shares to offset any taxes, to the disadvantage of actual investors with capital at risk.

Posted by DavidCayJ | Report as abusive
 

Fred5407, Romney’s track record is that he laid off several thousand people, while making a fortune and paid at half the effective tax rate of his laid off employees…that is essentially what has happened. It is a cynicism to have such a person as a president.

Posted by Ananke | Report as abusive
 

The reason most citizens want to know the tax situation of presidential candidates is their desire to know if that person will understand the needs of those who are not wealthy and will be fair to every part of the population. The issue of unfair taxation laws is important and need to be addressed. Most of those in the lower 40% of the wealth ladder are very resentful of the way politicians are preferencing the rich. Tax returns, and the candidates transparency about them, are as close as they can get to judging the person’s probable job performance.

Posted by retired45 | Report as abusive
 

When it comes to producing jobs, where is the beef?

This claim is made over and over and over and over when it comes down to taxing the wealthy. First, as a class, where is there any evidence whatsoever that people in the top 10% of the income distribution create any jobs in the USA for American citizens? My understanding that by far the bulk of jobs comes from the efforts of small businessmen who make less than the FICA maximum rather than from the wealthy.

Most people who actually look someone in the eye and hire them to do something are not rich. And they are not in the top 10% either.

The rest of the “create jobs” propaganda entails yet more bait and switch deceit — “small” shifting by multiple orders of magnitude depending whether the speaker is on the offensive or the defensive.

Tax benefits should be restricted to people who can PROVE the have created net jobs in America for American citizens. Why not? Why should taxpayers subsidize the export of jobs and facilities? Why should taxpayers subsidize pseudo-bankruptcy shell games that leave management with millions, labor with slashed benefits and the Treasury with tens of millions in subsidies to pay?? Stop subsidies to the country wreckers now!

Posted by txgadfly | Report as abusive
 

@ txgadfly,
Take a look at our new Tax Break blog at
http://blogs.reuters.com/taxbreak/

On the issue you raise — f how much followup state governments due to determine how well companies that get subsidies fulfill promises of creating or retaining jobs — you will find this post I wrote last week:

http://blogs.reuters.com/taxbreak/2012/0 1/20/how-well-do-states-monitor-the-impa ct-of-corporate-tax-breaks/

Posted by DavidCayJ | Report as abusive
 

What is most amusing about the liberal commentariat on this is that, all of a sudden, a “rich” candidate is a problem. Apparently it is only a problem if you work for it (Romney) – the liberals prefer their heroes to inherit it (FDR, JFK) or marry it (Kerry).

Posted by SayHey | Report as abusive
 

Mr. Johnson,

You reply to me “@Gordon2352, the carried interest issue does not apply to all of the wealthy, just organizers of certain investment funds. Carried interest is compensation for services, but Congress allows these interests to be treated as capital gains even though the manager has only a profits interest in return for his labor. This makes the 15% rate in carried interests a significantly different issue than capital gains rates per se because the manager does not have capital at risk, the clients do. People who disagree with this view mostly acknowledge carried interest is compensation for services, but contend the investment managers have so much market power they would extract higher profit shares to offset any taxes, to the disadvantage of actual investors with capital at risk.”

======================================== =========

In my reply to you I stressed that one of the major problems in the US tax code is the issue of 15% taxation on dividends and capital gains, and “ALL the other issues in your article are totally meaningless in terms of this basic inequity in the US tax laws, since this issue is the crux of this particular problem.”

You state in your article, “Most of Romney’s income consists of dividends and capital gains, which Congress taxes at 15 percent. Were his income in wages, he would have paid a much higher rate.”

THAT is a basic inequity in the US tax codes that should be corrected — one that benefits primarily the wealthy class (such as Romney) which you apparently don’t seem to understand.

Meaning the issue of “carried interest” is insignificant compared to the basic inequity in the rates of taxation between earned and unearned income.

Even you yourself point out the problem of “carried interest” is a narrow issue in your reply to me, not even relating to most of those filing returns.

I certainly did not bring it up in my criticism of your article, so I don’t understand why you would argue with me on something that isn’t even pertinent to the issue.

You should not even have mentioned the issue of “carried interest” in your article. It was placed there for “effect”, but has no real relevance.

I don’t know how I could possibly put it much simpler than that.

PseudoTurtle
CPA/MBA

Posted by Gordon2352 | Report as abusive
 

Mr. Johnston,

I understand you are basically talking about the “timing” of Romney’s taxes, while I am stating the timing is not the real issue, but the “rate” he is paying that is grossly unfair, which you do not stress in your article.

If you wanted to do an article on the issue of Romney’s special tax privileges as a wealthy person versus the rules that apply to the rest of us, it would seem to me his tax RATE would be far more important than when he pays his tax.

PseudoTurtle
CPA/MBA

Posted by Gordon2352 | Report as abusive
 

“They can earn compensation now and pay taxes later, decades later if they want. It’s called “carried interest.””

That’s false. Carried interest is a partnership interest taxed like any other partnership interest, meaning that it’s taxable currently and can’t be deferred. Johnston is confusing carried interest w/ incentive allocation, which is more often earned by hedge fund managers w/ a lot of ordinary income. By deferring (which they can’t do any longer, FTR), they convert the income into ordinary income. Obviously, a private equity manager wouldn’t want to defer, since it would transform long-term cap gains and qualified dividends into ordinary income.

Posted by jpe12 | Report as abusive
 

An added note of interest is Romney’s dad, a wealthy man when he became a politician, who reported paying at a 38% rate with most of his posted returns.

I guess in reducing their ‘legal’ tax obligation by -23%, millionaires have come a long way since Romney’s dad’s day.

Posted by NobleKin | Report as abusive
 

@Okieknoppie

On a different article I posted the following comment and it applies to you…

“Your statement is a typical parroting of an baseless Right Wing Radio statement about Mitt’s income.

Capital Gains is absolutely not a double taxation.

Assuming Mitt paid taxes at the normal rate and then invested his ‘after tax’ income into dividend earning stocks, he is being taxed on the DIVIDEND, not the value or ‘Basis’ he invested. The Basis does not change and he is never taxed on this amount.

Further, if he were to sell the stock, the Basis would be used to determine whether he would pay taxes on a gain (at the 15% rate) or report a loss (if the price of the stock rises above what he paid, he has a gain, if the stock price is lower than what he paid he has a loss – if he sells). To be fair there are instances where the tax rate for Capital Gains is higher than 15% (max 28%) and there are differences between short and long term gains/losses, but a good tax and investment strategy will avoid the higher rates.

Where it gets interesting is how a guy like Mitt can apply the losses. On a capital loss he gets to take the full value of the loss and apply that against the full value of his REGULAR income…which doesn’t lower his taxes based on the 15% rate, but on the higher Federal Income Tax rate…

The timing of how they can do this is key.

Guys like Mitt can manipulate their investment strategy to pay minimal Federal Income Taxes using the capital gains and loss rules. His Trust pays an advisor a lot of money to do this for mim and his money.”

Super rich guys like Mitt have access to investment opportunities and investment protections the average investor/American does not.

Posted by NobleKin | Report as abusive
 

“On a capital loss he gets to take the full value of the loss and apply that against the full value of his REGULAR income”

One can only deduct $3,000 of capital losses from ordinary income. Any losses over that are carried forward to offset capital gains in future years.

Posted by jpe12 | Report as abusive
 

” Hedge fund and private equity firms have spent a lot of money on lobbying and campaign donations to avert any such change.”

They ended those deferrals in 2008 w/ the passage of 457A. Maybe they’re spending money working on a time machine.

Posted by jpe12 | Report as abusive
 

Romney has to be worth more than $200 million; otherwise, he’s earning over 10 percent return on capital year-over-year, which is rare in this interest rate environment.

“One can only deduct $3,000 of capital losses from ordinary income. Any losses over that are carried forward to offset capital gains in future years.”

Not so. The super wealthy have tax loopholes that allow them to deduct far more than most ordinary mortals.

Posted by Dave9000 | Report as abusive
 

Double taxation: Corporations pay tax 35% on gains. What is left over increases value of shares or is distributed as dividends, taxed at 15% (or less, if lower income)–lomg term gains or qualified dividends. The assets are at risk. If taxation increases, more likely to invest in sure things, as Kerry did, municipal bonds and pay no tax. The poor get more for their FICA dollar than do the rich. If you pay no FICA you get no SOcial Security or Medicare benefits. Obama also proposes preferences for capital investment, except his best deals go to his buddies.

Posted by vincent31 | Report as abusive
 

The UK battled back and forth on rate for carried interest, up and down, settling on a lttle bit higher than US. Enough to satisfy demogogues and low enough to keep capital at work in UK.

Then again Romney could pay more in tax and give less to charity. We all want the Feds to spend our money better than we can.

Posted by vincent31 | Report as abusive
 

Romney worked for 25 years before holding office. His rivals made their money in or after office. As far as we know his “hidden” taxes were probed by IRS. High profile rich man gets audited. The taxes are a distraction. There are no poor, common-man presidents. I want someone who knows how to get the job done not give speeches on what is fair.

Posted by vincent31 | Report as abusive
 

Demanding that Romney release everything is fishing for something that will embarrass him. We know nothing about Obama’s past. No records at all. These campaigns are a waste of time. Just vote. Divide. Pander. Pretend that the rich can pay for every social benefit and that they will. Pretend America can do what no other country has done. We can pay for benefits only by slow growth and higher taxes. The money has to come out of the investor class to go into the spending class. or the jobless class as they are called in Spain.

Posted by vincent31 | Report as abusive
 

Mr. Johnston,

I thought you might be enlightened by this article in Bloomberg, which is written quite well, and explains carried interest from the perspective of one who understands tax law.

======================================== =========

If Carried Interest Irks You, You Don’t Get It: William Dantzler

By J. William Dantzler Jr. Jan 29, 2012 4:00 PM PT

The release of Mitt Romney’s tax returns last week gave the nation a crash course in the mysterious “carried interest” that was said to allow him to pay 15 percent on millions of dollars of capital gains.

Unfortunately, more heat than light was shed on what a carried interest really is.

A carried interest is an ownership interest in a partnership that entitles the partner to a percentage of the profits but doesn’t obligate the partner to provide any capital. It is the other partners who provide the necessary capital, and they are thereby “carrying” the partner who does not.

A carried interest can arise in many contexts. It is fairly common on Main Street. My dad was a veterinarian who, as he got up in years, brought a young veterinarian into his practice. Although my dad did not call it that, the young veterinarian had a carried interest — that is a percentage of the profit with no obligation to invest capital.

Income from being a veterinarian is ordinary income, and thus the young partner with the carried interest paid tax on his share of the partnership income at ordinary income rates. If the underlying activity of the partnership, however, is an activity that produces capital gains, then the partner with the carried interest will have a share of the underlying capital gains and will pay tax on that income at a 15 percent rate.

Different Income

That is the situation with a private-equity partnership whose business is to buy companies and (it hopes) sell those companies a few years later at a profit. So, the only difference between an investor with a carried interest in a private-equity partnership and my dad’s young veterinary partner is that the underlying activity in private equity produces capital-gain income, and Congress has chosen to tax capital-gain income at 15 percent.

For a couple of years after President Ronald Reagan’s tax reforms were adopted in 1986, capital gains were taxed at the same rate as ordinary income. That was very unusual. In most recent years, capital gains have been taxed at a lower rate than ordinary income, and the differential was increased by the Bush tax cuts.

You can argue whether capital gains should be taxed at 15 percent, but that is a big issue having only a little to do with carried interest.

In all the years that capital gains have enjoyed a favorable tax rate, there has been a simple definition of what is a capital gain. It is simply gain on the sale of investment property, such as stock. The distinction between capital gain and ordinary income has never been based on the amount of sweat that went into producing the income. The workaholic investor who spends 60 hours per week researching stocks still earns capital gains that are no different, in the tax law, from the gains of an investor who gives little thought to his portfolio.

Bill Gates has a capital gain when he sells Microsoft Corp. (MSFT) stock even though, by most accounts, Microsoft would not exist without his considerable effort. Similarly, the distinction between capital gains and ordinary income has never been based on the amount of money invested or, indeed, whether there was any investment at all. An entrepreneur who starts a business with no investment (or more likely an investment by someone else with money) still generates capital gains on the sale of her business, and it is sometimes said that this fact accounts for the vibrancy of the tech economy in the United States.

What then would be the basis for saying that a private- equity executive with a carried interest should have his percentage of the capital gain from the sale of an underlying investment recharacterized as ordinary income? Is it because he sweats and the other investors don’t?

Well, maybe, but what about the full-time investor who sweats over his stock portfolio or the entrepreneur who slaved over her startup business. It is hard to make a distinction based on effort.

Plus, most private-equity executives earn large cash salaries that are taxed as ordinary income. Do we have to value the executive’s effort and see if it exceeds her cash salary, and then attribute that excess to the carried interest?

Tax Law Perspective

From the perspective of tax law, it just doesn’t make sense to have a tax distinction based on the sweat of the private- equity executive. A distinction based on the fact that the private-equity executive with the carried interest provides no capital to the partnership seems hard, too.

Do we really want a tax law in which only people who already have money can earn a capital gain? And, if earning a capital gain requires an investment, then how much? Does it have to be a big investment? Can it be borrowed from the other partners? Isn’t a carried interest in effect just a loan from the moneyed partners?

These are difficult questions that affect the entire structure of capital-gains taxation — not just carried interest. It would be very hard to draw a fair line between the type of private-equity investment that is deserving of capital gain treatment and that which is not.

It is perhaps not an accident that the carried interest discussion is taking place in the political arena — over Mr. Romney’s tax returns — rather than the worlds of tax law or tax policy, and that the advocates of taxing carried interest at higher rates are not tax experts who understand the complexity of the issue and the difficulty of drawing fair lines.

(J. William Dantzler Jr. is a partner at law firm White & Case LLP and head of its global tax practice. The opinions expressed are his own.)

======================================== ============

Carried interest is a “tempest in a tea pot” compared to the larger picture of how to account for capital gains taxes to ensure fairness in the tax laws. An argument over carried interest is like arguing over a single tree, when there is a whole forest to take care of.

PseudoTurtle
CPA/MBA

Posted by Gordon2352 | Report as abusive
 

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