Why Romney Pays A 15 Percent Tax Rate

Speaking at a campaign stop in South Carolina Tuesday, GOP presidential hopeful Mitt Romney said his tax rate in recent years is “probably closer to 15 percent than anything,” because his “income comes overwhelmingly from investments” rather than from a salary.

Americans pay taxes on their wages and salaries and they pay a lower rate on income from investments, on dividends and capital gains.

But then there is this gray area that Mitt Romney and private equity firms take advantage of called carried interest.

Tax Treatment Of Carried Interest

“Carried interest is the way that hedge fund managers and private equity firm managers get paid when they do a deal,” Howard Gleckman of the Tax Policy Institute told Here & Now‘s Robin Young.

Gleckman says private equity firms bring in outside investors. To get in on the deals, investors pay the firms in two ways– an initial fee, and a 20 percent cut of future profits.

When the owners of private equity firms pay taxes on that compensation from the investors, they pay as if it were capital gains– so that means they are paying a top rate of no more than 15 percent.

“Ordinarily if they were paid like the rest of us in wages and salaries, they’d be paying a top rate of up to 35 percent,” he said.

Gleckman said the carried interest tax arrangement is completely legal and not uncommon.

Ordinary income: From wages, salaries and commissions. Taxed at 10 percent to 35 percent, with higher earners paying higher rates. Most Americans pay the bulk of their federal income taxes in this category.

Investment income: From interest payments, dividends, and capital gains collected upon the sale of stocks, bonds, mutual funds and other investments owned for more than one year. Rate is 15 percent.

Carried interest: The 20 percent share of profits that private equity firms take on investment deals. These funds are taxed as long-term capital gains, allowing managers at the firms and at hedge funds to have a large part of their income taxed at 15 percent instead of 35 percent.

From The Boston Globe And Investopedia

Is Low Tax Rate Justified?

Bob McIntyre, director of Citizens for Tax Justice says carried interest is just income earned from working, and it should not be taxed differently from salary.

But supporters of the low tax rate, like Douglas Holtz-Aiken, John McCain’s former economic adviser say it’s important for capital formation, for developing new companies, that doing these investment deals is an important part of the U.S. economy and in order to do that they need high compensation.

But Gleckman points to a counter argument.

“They’re not putting their own money at risk. They’re putting someone else’s money at risk,” Gleckman said. “The idea of low capital gains taxes is you get to enjoy a low tax when you risk your own money to make an investment, that’s not what these guys are doing,” he said.

Boston Globe: Romney Says Tax Burden Is 15 Percent
Tax Vox: Bain And The Tax Treatment Of ‘They Carry’

Guest:

Howard Gleckman, resident fellow at the non-partisan Tax Policy Center, editor of the blog Tax Vox
Matt Viser, national political reporter for the Boston Globe

We welcome comments from all of our listeners. Post below. Please stay on topic and be civil. Comments may be moderated by us, but you are solely responsible for the content of your comments.

Anonymous

There is no doubt about it: Mitt Romney is the pure representative of the 1%.

He does not work and gets the yearly wage of a MainSt worker in one DAY if it is true what I heard and I calculated right.
When I immigrated to the USA somone told me, welcome to capitalism central. Yes, welcome to a country that blinds its people by boasting about being the land of the free. A groundless claim because one truth is not considered but valid. The rich rule over the poor and the borrower is servant to the lender, as Salomon says.

So what went wrong? You cannot serve both, God and riches says the Bible.

And in this respect the 99% of the USA are responsible as well. As long as they refuse to accept Christ as King of King, supreme lawgiver and head of all governments, they will not have a free society. Democracy is a smoke screen. It is ruled by the rich. Currently more than ever because of the huge national debt.

Watch: German preacher’s thoughts on 2012�
http://www.youtube.com/watch?v=gpLYq525SpM
TheChatBox

Yeesh. NPR sure comes off as a pure defender of the 1%. I thought you were supposed to be objective lol
J Frog

Agree that “carried interest” is a silly tax rule. It just goes to prove that the ENTIRE tax code should to be revamped. Who (what senators and representatives) put “carried interest” loophole into the tax code? I’d like to know. It seems to benefit very few…mostly east coast citizens.

By the way, President Obama just promoted a former Bain Capital person to run OMB:
http://campaign2012.washingtonexaminer.com/blogs/beltway-confidential/new-obama-omb-director-bain-alum/317976
�
How ironic. I wonder what his tax rate is?
Judy

Mitt Romney’s 15% tax rate highlights one of the major inequities with the US tax system: the assumption that money earned from investments is somehow more worthy than money earned by going out to work each day.

The argument used by those in favor of lower taxes for capital gains – that the money was already taxed before it was invested – could apply equally to all income:
1. I earn money at work, and pay taxes on it.
2. I go to a store and buy goods with my earnings. The store owner pays taxes on the money I pay for goods.
3. The store owner buys goods at wholesale. The wholesaler pays taxes on what he received from the store owner.
4. Ad infinitum.

So what makes investment income so special?

Surely all income, whether earned or unearned, should be taxed equally.
Zeek

As a registered independent I wants WBRU/NPR to know that I and others are so tired of NPR desperately seeking to find ways to bring Romney down. In 2008 it was the Mormon card, this election its the tax card( neither hold much if any weight). The media once again wants to support the least attractive of the 2 republican front runners and it is so clear why and what the overarching intentions are at NPR. Rarely if ever do we the PUBLIC(as in Public Radio) hear balanced reporting from NPR and quite frankly I and others are very tired of the manipulation. I agree the 15% story is annoying and even unjust, but guess what, it appears to be legal and bet that nearly every wealthy politician takes advantage of that privilege if they can. If that is the best story you can spend 95% of your air time on, this baby will backfire on NPR. Also its SO interesting that there has been little to no coverage on Gingrichs background and policies. There would be piles of juicy material for you there!!!
- Em
  
  The purpose of NPR is bring the public ALL news. Whether you take this news as annoying or offensive, news is news. The 15% tax on carried interest does appear to be legal. Maybe this particular tax avoidance has been overlooked by lawmakers, and a story like this (which makes the public aware of such a tax advantage) could potentially bring to light an unknown loophole as well as an update to the tax code.
- Celarth
  
  This is news because the Republicans running against him won’t let it go. I know it is tempting to blame everything you don’t like on some one else, but it’s time to look at where the story is coming from. Possibly you should ask Gingrich and the others to let go.
- http://profiles.google.com/rickevans033050 Rick Evans
  
  “I agree the 15% story is annoying and even unjust, but guess what, it
  appears to be legal and bet that nearly every wealthy politician takes
  advantage of that privilege if they can. ”
  
  Would you have applied that circle of logic to prohibition or Jim Crow. Just because a law is stupid is not a reason to agree with it. Stupid or unfair laws can be appealed.
http://profiles.google.com/rickevans033050 Rick Evans

I wonder how many remember that only a couple of months after the Massachusetts news media were distracted by their giddiness of the signing of RomneyCare that Bain Capital bought Hospital Corporation of America on the bet that the Massachusetts medical industrial mafia would move to Washington and take it national. Obamney Care is Willard’s gain. Wanna bet he flips or flops on reversing that individual mandate?
Jack Charles Schoenholtz

At the time of the proposed merger in 1997, when
Staples and Office Depot tried to displace Office Max, Mitt Romney─later,
the 2012 Republican presidential hopeful─was CEO of Bain Capital, the major venture capital partner in Staples,
and on the Staples board for ten years throughout the period of the scheme.
Antitrust Division filings showed Staples and Office Depot were charging higher
prices in parts of Florida counties where they didn’t compete against each
other and lower prices in areas where they were rivals of Office Max. The FTC
found out about this collusion by analyzing scanner data at the stores’
checkout counters and decided to seek an injunction. Washington, DC, federal district
Judge Thomas F. Hogan, after “visiting various stores,” enjoined the merger as appearing
to violate the antitrust laws saying “Likelihood of success on
the merits in cases such as this means the likelihood that the Commission will succeed
in proving, after a full administrative trial on the merits, that the effect of
a merger between Staples

and Office Depot ‘may be substantially to lessen
competition, or to tend to create a monopoly’in violation of Section 7 of the
Clayton Act . . . in a suit for a preliminary injunction, the government need
only show that there is a ‘reasonable probability’ that the challenged
transaction will substantially impair competition. . . [and] the Court cannot
find that those efficiencies [alleged by the defendants] would result in the
creation of so many additional jobs that the public equity would outweigh those
argued by the plaintiff.” The proposed merger was dropped.
http://twitter.com/KenyattaYamel kenyatta yamel

I think it’s an outrage that I pay a higher tax rate than this multimillionaire. No wonder he’s out of touch. He thinks the middle class includes people making millions
Anonymous

As an inventor of a minimally produced commodity type product, and an independent contractor in my career life, I’m delighted discussion of the capitalist system has reached the national media. Thanks for your attempts at indepth reporting, regardless of what I think of your effort. Folks seem to forget that our country was founded on and has survived due to our market system. The ramifications of this haven’t changed much since the 1600′s. Those that do the research into how to minimize their taxes pay lower taxes. Those that risk their own and their family’s safety to start a business or grow a large business and succeed – most do not succeed – earn more money than the general public and usually pay experts to protect it. It’s too bad for Romney (known as Ken Doll at our house) that the controversy swirls around him – this is more important than any single cadidate.�
So many seem to feel that for-profit companies owe it to the public to protect and defend, and make sure elements of the public have what they need. The last time I looked, that was GOVERNMENT’s job. I’m a big fan of the Dodd-Frank effort and still hope to see those who raped the public trust punished in a significant way. But! The hour I hear that a company in which I’ve invested money I want to ‘grow’ has put the public’s welfare above investor welfare is the hour I take my money out of that investment. Those who gripe about others with more than they, or about the ‘inequity’ of wealth should invest in economic education instead of large screen TV’s and see if they don’t come out ahead.
http://twitter.com/KenyattaYamel kenyatta yamel

no wonder republicans like low capital gains taxes their capital gains while we get taxed as low to moderate income workers.
Anonymous

Ok, I understand that paying 15% on money earned from
other people investments is unfair but it’s more an indictment of our tax code
then of Mitt. I’d forgive him if he vows
to close that loophole. I’m not convinced
Bain or private equity firms are bad for the employees, many of the company they
attempt to turn around were most likely going to go out of business. With that
in mind cutting the workforce drastically is better than cutting all the workforce when they close. The companies that went bad were going to
close possibly quicker.

Also private equity firms runs of private capital so it would
make sense that profits are distributed more narrowly.
Cjones

If the idea behind a lower tax rate on the wealthy and businesses will allow more job creation and will stimulate the ecomony, I don’t understand how it follows that the working people of the country will benefit if they are having to pay a higher tax rate on their earned income, therefore stifling their ability to spend in the marketplace and stimulate the economy.

I believe the inequity of the tax rates only serves to allow the rich to keep more of their income with little or no consideration of how hard it is for the majority of our citizens to move forward in this economy.

While the wealthy’s incomes are growing, the rest of us are loosing ground and the country’s economy doesn’t seem to be expanding, i.e. job creation/productivity, to allow for the disadvantaged to start to climb out of the hole that is our current state of affairs.

Doesn’t it make sense that if the consumer had more money to spend in the marketplace, the economy would be stimulated, more products would be needed, therefore more jobs would be created, families would be better off and the wealthy and business owners would still make more money!!

Bottom line, THE TAX CODE NEEDS TO BE REFORMED!�
BHA in Vermont

Tax code loopholes like “carried interest” exist because the rich make laws to allow them to evade taxes. And with the Citizen’s United ruling, corporations buy elections to get the laws tilted in their favor.

Why do you think CEOs of big corporations get a large percentage of their income as stock options? Is it an incentive for them to improve the company over the long term? So claimed but it is really because they pay 15% on the gains when they sell. $20M income is either $1M salary and $19M in profit on prior year options ~ $3.15 million in tax or $20M in salary ~$7 million in tax. And who could expect them to live on $13M a year?? That would be UNFAIR and certainly keep them from creating all those jobs they (ok they don’t) create from their personal after tax income.

Don’t expect any of this to change because the 99% can’t buy votes.
Fred

I have to say that one of the things that I really dislike about discussions like this is that a comparison of tax percentages is only one side of the story. You speak about Mitt Romney’s 15% that on his $40,000,00 he only paid $6,000,000. Six million dollars! How many of Warren Buffett’s secretaries with their higher percentages are needed before they reach a payment of $6,000,000? In addition, when you discuss the capital gains tax of 15% why do you not speak of the corporate taxes that have to be paid prior to the capital gains tax? Fred
Amosb52

You mentioned Mitt and Newt, but what would Ron Paul do about these tax issues?