It's already pretty easy to be mad at the super-low tax rates paid by private-equity executives. But here's another reason, maybe, to shake our fists at them: They hate America.
That is the verdict of Joseph Stiglitz, Nobel-Prize-winning Columbia economics professor, who writes in the Guardian on Monday that a tax break commonly enjoyed by Mitt Romney and other private-equity chieftains "weakens the bonds that hold a society together."
Not only that, but taxing "carried interest" income at the 15 percent capital-gains rate instead of the top income-tax rate of 35 percent costs the government billions of dollars a year, making it harder to invest in the economy by building roads and bridges and schools and such, according to Stiglitz.
"[T]he problem is not just Romney," Stiglitz writes; "writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish."
Conservatives will argue that bleeding the government of funds is a feature, not a bug, of taxing this sort of income at 15 percent instead of 35 percent: You encourage private investment, which should lessen the need for government to spend money on the economy.
But a low tax rate for capital gains on risky investments is one thing. An entirely different pickle jar is the low tax rate for "carried interest," which is essentially a management fee that private-equity and hedge-fund managers take for "managing" not to run their clients' investments totally into the ground. It's really not the same thing at all as a profit on a risky investment.
Carried interest has long been a subject of controversy, but it has gotten extra attention with the success of Romney's bid for the Republican nomination for president. President Obama has proposed raising the tax rate on carried interest to 35 percent, a suggestion that Blackstone Group CEO Stephen Schwarzman likened to Hitler invading Poland.
Schwarzman actually said of raising the carried-interest tax rate: "It's a war. It's like when Hitler invaded Poland in 1939." Just in case you weren't sure how seriously some executives were taking this topic.
Romney himself has been just a bit more sheepish about the controversy, all but conceding earlier this year that his low tax rate was kind of unfair.
"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," Romney squirmed when questioned about it on CNBC back in March. (Note to self: Idea for future article: How many dimensions are in your income stream? Mine has one, or sometimes zero, when I get fired.)
Stiglitz's column comes at a time of heightened focus on other aspects of Romney's taxes and his payment thereof. Many noses were wrinkled at the revelation earlier this year that Romney paid just 13.9 percent in taxes on $21.6 million in income in 2010. Romney did not help the cause when he pinky-swore, in response to complaints that he was not releasing more tax returns, that he had never paid less than 13 percent in the past decade. Now the New York Attorney General is examining the legality of Bain Capital and other firms using a sketchy accounting trick to magically transform regular income into carried interest.
That scheme could be entirely legal. The IRS started looking into it five years ago, but then sat on it for some reason, according to Reuters.
But the whole controversy would be moot if carried interest were simply taxed like ordinary income, as it should be. As the New Yorker's James Surowiecki pointed out earlier this year, money managers at mutual funds and public companies don't get this tax break. Only managers at private firms do. Even if you don't buy Stiglitz's argument about the fundamental destructiveness of this tax break, that argument isn't necessary to want to see it end. The carried-interest tax rate is simply unfair.
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Dean Baker: Romney's Success at Bain Capital: The Business as Scam Model
I'm a very anti-government, libertarian sort of fellow. On top of that, I have a pretty good understanding of the tax code (I'm not a CPA, but I double majored in Finance and Accounting at Wharton). It's because of this background - and not in spite of it - that I oppose the tax treatment of carried interst. It's a distorionary tax policy and it's bad for the economy because it subsidizes PE relative to other forms of financial employment.
1) Carried Interest is based on the returns of the overall fund, is variable and is based on risk. If the businesses managed by the fund fails, no carry. It is designed to reward successful deployment of risk capital and therefore is considered for capital gains tax. PE managers are also personally invested (their own money) and therefore this also contributes to the inclusion under capital gains.
2) PE managers do charge a fee to their investors, which is around 1-2.5%. This covers the cost of managing the fund over its 10 year lifespan. This incurs corporation tax. Salaries of the managers (like Mr Romney) incur income tax.
3) Mutual fund investors don't get carry because they don't take a personal stake in their funds. They invest in a range of different things: cash, equities, commodities and alternatives (including PE). They are going for safe returns not risky ones. CGT does not apply.
4) Private Equity funds are not Hedge Funds. Hedge Funds may include some PE investment in the course of what they do (along with investments in equities, derivatives, short-selling and all sorts of things to HEDGE their investors money). PE funds only invest their investor's money in companies.
5) The effect on (VC funded) Silicon Valley would be catastrophic
Please do your research before writing something like this again... frankly it's embarrassing.
Re the tax rate, actually the rate does matter for capital gains if you're risking your money to invest in a business whether it's a start-up or turning around an old one, or if you invest in a company on the stock market there needs to be reward for that risk - afterall, you could lose your investment or that company could grown and provide increased employment and economic returns as a result.
Studies have consistently shown that increases in capital gains rates lead to a reduction in investment in businesses, and frankly that's bad for everyone.
However, for two obvious reasons, that's not the way that carried interest works (there's no way to accurately price the value of carried interest at the time the fund closes and managers would stronlgly object to paying a large tax years before they realized cash flow). Instead, carried interest functions as a bonus. You're implied argument that since carried interest is at risk it should be treated as a capital gain simply doesn't make sense. I'm a consultant and I can guarantee you that my end of year bonus is subject to the risk of my own and my company's success or failure. However, I pay ordinary income tax rates on my bonus.
While I don't disagree with any of your 5 points, they have nothing to do with the simple fact that - from an economic perspective - the special tax treat of carried interest is a bad thing. Carried interest creates economic distortion because it treats one type of labor income differently for tax purposes than any other form. Economic distortions caused by subsidies are, by definition, bad for the economy as a whole.
Let's look at it this way though:
- LPs (pension funds or whoever) provide GPs (PE firms) the funds to invest
- Carried interest is the capital growth on that investment
- As part of the agreement between the two parties, the LP agrees to give the GP up to 20% of that carry, or looking at it another way, 20% of their capital gains
At no time is the capital gain on the returns of the fund considered as a bonus, it (like any other form of capital gain) is the reward for successfully investing.
There are all sorts of subsidies that create economic distortions, many are detrimental. Why pick on one that encourages economic growth?
It is time to quit listenting to anything they say as it ONLY benefits them. We the people have the majority to stop this by voting against their Candidates. It is time!!
AND the rules must be perceived to be fair.
Otherwise people wise up, and refuse to play "the game".
One of these days, American taxpayers are going to "wise up" to the scam of American taxes, that they don't apply equally, and that the rich are buying congress, to write laws to benefit themselves.
What then?
Thus the means / narrative can always change to fit the dynamic of the time regardless of whether it makes any sort of political, societal or financial sense.
A new Tax Justice Network (TJN) USA report reveals an estimated $21 - $32 trillion of hidden and stolen wealth stashed largely tax-free secretly. How much comes from the superrich in US is unclear, but it´s a reason why the tax revenues in US are among the lowest in the world.
In 2010 US taxes collected by federal, state and municipal governments amounted to 24.8% of GDP. Only two industrialized economies raised less tax revenue as a percent of GDP - Chile and Mexico. Germany raised 36,3% and Sweden 45,8%, and both countries have much healthier economy than US. So to claim that the tax burden is big in US is to exaggerate, and we must conclude it´s not based on a state of facts but a state of mind, a delusional state of mind. There are only two ways to fix more tax revenue - either raise the tax percent of the GDP or broaden the tax base.
Obama refers to Romney as "Romney Hood" and Romney refers to Obama as the "Sheriff of Nottingham" are just smokescreens to keep you focus off the real issues - the superrich plundering of US since the 70´s. Fix that and the US tax revenue will recover and there will be a balanced budget unless you slash the Defence and Homeland Security budget with at least 75%. The enemy of we the people you´ll find in these circles, not abroad.
They are not simply following the law, Romney through Bain has spent millions of dollars lobbying Congress because this saves him and other's like him 10's of millions of dollars each year adding up to Billions overall.