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Joseph Stiglitz: Private Equity Tax Break 'Weakens The Bonds That Hold A Society Together'

Posted: 09/04/2012 2:07 pm

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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