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IRS Prepares To Take More From Private Equity Chiefs Like Mitt Romney, Report Says

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Will presumptive GOP presidential nominee Mitt Romney end up paying a higher tax rate on his carried interest income?
Will presumptive GOP presidential nominee Mitt Romney end up paying a higher tax rate on his carried interest income?

Uncle Sam seems to be gearing up to take more tax dollars from Mitt Romney and his brothers in the private-equity fraternity.

The Internal Revenue Service is preparing rules and guidelines in the event that "carried interest" -- the money private-equity firms pay current and former executives like Romney every year, if the firms do well -- gets taxed like regular income, Reuters reports.

Many people, including rich ones, from Warren Buffett to maybe even sometimes Romney himself, agree that it doesn't make much sense for carried interest to be taxed at only 15 percent, the rate of capital gains. Capital gains are when you gamble your own money in the stock market, or what have you, and come up a winner. You get carried interest, in contrast, simply for showing up to work every day and managing other peoples' money for them in a reasonably competent fashion. In Romney's case, you can still get that money even if it's been years since you were active in private equity.

If Romney's estimated $20 million income in 2011 had been taxed at the top 35 percent rate instead of at 15 percent, the government could expect to get $7 million in tax revenue from Romney for that year, instead of the $3 million Romney estimates he owes (he filed for an extension for last year's taxes).

Unfortunately, as you might notice, the numbers overall are relatively small. Taxing carried interest as regular income might raise about $13.5 billion in revenue over the next 10 years, according to a Treasury Department estimate. Some years might see more than $1.9 billion in extra revenue, but that's a drop in a $3 trillion annual revenue bucket. It's a rounding error in a budget deficit that might near $1 trillion in fiscal year 2013.

But every little bit helps, maybe? As Michael Graetz, a professor of tax law at Columbia Law School, told the Wall Street Journal recently, that's enough to fund the Secret Service, or most of the budget of the Food and Drug Administration. Or, we might add, four years' worth of funding for the Corporation for Public Broadcasting.

The carried-interest tax rate issue flared up earlier this year, when Romney released his past tax returns and people realized to their horror that he was paying a tax rate of about 15 percent on his income.

The issue of carried interest died down eventually, as it always seems to do. But Romney's past in private equity is once again front-and-center in the presidential campaign.

And the tax issue in particular may re-flare later this year, as the economy approaches the dreaded "fiscal cliff" that awaits the flip of the calendar to 2013. That's when several tax increases and spending cuts are scheduled to take place that could throw the economy into a new recession, the Organization for Economic Co-operation and Development recently warned.

Defenders of the low tax rate for carried interest will likely say that higher rates would hurt the economy by discouraging investment and taking money out of the hands of the job creators, who will then trickle it down to the rest of us poor slobs at golf courses and nail salons. Some defenders even go so far as to suggest it's something maybe Hitler would do.

But some of those same defenders are also in the camp that will be groaning loud and long about the staggering federal budget deficit at the end of the year. Closing this tax loophole may be one of the least-controversial revenue-raisers available to lawmakers.

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