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Mitt Romney Gets Suddenly Squishy On Carried Interest (VIDEO)

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Over at Business Insider, Linette Lopez catches 2012 presidential aspirant Mitt Romney on CNBC, sending messages on one of his favorite tax-breaks-for-the-1 percent that are...well, let's say decidedly mixed. When "Squawk Box" host Joe Kernan asked Romney for his position on taxing carried interest income, the former Massachusetts governor responded with an answer that will likely give private equity professionals and hedge fund managers a slight tinge of queasiness.

Back when Mitt Romney's 2010 tax returns were a focus of scrutiny in the campaign season, the big news was that Romney paid a low 13.9 percent rate on $21.6 million in income. As HuffPost's Paul Blumenthal pointed out at the time, the rate was "lower than that of a person earning $50,000." A key component of Romney's fortune -- and a major contributor to his overall low rate -- was his "carried interest" income. At the time, Daily Finance's Bruce Watson explained the "sweetest" of Romney's tax breaks pretty effectively:

You haven't heard of carried interest? Basically, it's a share of investment income that goes to the private equity manager who oversaw the investment. Romney's carried interest income doesn't come from dividends on stock he owns, nor from the sale of stock that he once owned. The money wasn't generated from income that he had already paid tax on. Think of it as being sort of like a tip skimmed off the top of all the money that his company makes for its investors.

But unlike tips for a waitress or cabbie, which are taxed at the same rate as wages, Romney's carried interest income is taxed at the same 15% rate as other investments. The discounted carried interest tax rate -- which is moderately controversial, but would be probably be seriously controversial if more people understood it -- has come under heavy attack in recent years, but is still in effect.

When President Barack Obama put out his tax plan about a month later, carried interest income was a spotlight issue, as his proposal would tax carried interest profits "at regular income rates of up to 35 percent." His plan read: “Currently, many hedge fund managers, private equity partners, and other managers in partnerships are able to pay a 15 percent capital gains rate on their labor income ... This tax loophole is inappropriate and allows these financial managers to pay a lower tax rate on their income than other workers.”

Of course, the hedge fund/private equity industry has dispatched an army of lobbyists and PR professionals to protect their interests (as well as Romney's). The Blackstone Group's Stephen Schwartzman, whose firm has spent $2.5 million in 2011 to fight various financial reforms, "compared President Barack Obama's proposal to tax carried interest at the personal income tax rate to Hitler's invasion of Poland," saying, "It's a war...it's like when Hitler invaded Poland in 1939."

So, does this make Romney the Neville Chamberlain in that narrative? That's probably too melodramatic. Nevertheless, Lopez correctly characterizes Romney's response to Kernan as "probably not what his former colleagues in the industry wanted to hear."

I think you have to look at each dimension of our income streams and ask if this is a true capital gain or carried income. And you look to either the Courts or the IRS too and look at the various structures and investment vehicles and say 'gosh is this a true capital investment with the risk of loss or is it instead ordinary income with no particular risk of loss. If it's ordinary income you should treat it as ordinary income and if it's capital gain you should treat it as capital gain. I don't believe that it's Congress' job or the Administration's job to say 'hey these people are making too much money lets change their tax rate to make them less able to be financially successful.' I think you do however need to apply the code in a way that's consistent across the board.

On the one hand, Romney clearly isn't taking a position on policy here. Rather than make it "Congress' job or the Administration's job," he punts the responsibility to the IRS. Of course, absent some sort of policy change -- like the one the Obama administration has proposed -- the only thing the IRS can do with that punt is call for a fair catch. Still, what could sow unease in the private equity/hedge fund set is the fact that Romney is essentially giving away the game, and philosophically aligning himself with the belief that this income should not be treated as a capital gain.

I have no idea if Romney is making some strange dog whistle (maybe his private equity pals have given all they can give to his campaign?) or is just accidentally telling the truth. But Romney is essentially admitting that the carried interest tax rate he benefits from is sort of a scam.

READ THE WHOLE THING:
Mitt Romney Gets Asked About Carried Interest, And His Response Is Almost Painful [The Business Insider]

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