December 5, 2023

DealBook: Romney Disclosure Reignites Debate Over Carried Interest Tax

Mitt Romney hosted a rally at the Florence Civic Center in Florence, S.C. on Tuesday.James Estrin/The New York TimesMitt Romney held a rally at the Florence Civic Center in Florence, S.C., on Tuesday.

The “carried interest” tax debate that has raged in Congress and on Wall Street over the last half-decade took center stage in the presidential race on Tuesday.

Mitt Romney, speaking at a campaign stop in Florence, S.C., revealed that his effective tax rate was about 15 percent.

“It’s probably closer to the 15 percent rate than anything,” Mr. Romney said. “Because my last 10 years, I’ve — my income comes overwhelmingly from investments made in the past, rather than ordinary income or rather than earned annual income.”

Mr. Romney’s disclosure is sure to reignite complaints that private equity executives — among the nation’s wealthiest individuals — get preferential tax treatment. Private equity executives are taxed at the capital gains rate of 15 percent on most of their earnings, a rate well below the 35 percent tax on ordinary income. Certain hedge fund managers, real estate investors and venture capitalists also earn much of their pay in the form of carried interest.

The White House, which has long expressed support for raising the tax rate on these investment managers, immediately seized on Mr. Romney’s acknowledgment. The president’s spokesman said Tuesday that the 15 percent tax rate reveals unfairness in the tax code.

The bulk of private equity executives’ compensation comes in the form of carried interest, which is the 20 percent cut of a fund’s profits they keep for themselves. If a private equity firm sells a company for a $1 billion profit, the firm’s executives are entitled to keep $200 million as a performance fee. (Mr. Romney’s former firm, Bain Capital, because of its superior investment record, keeps 30 percent of the profits in many of its funds.)

Investment managers who are against increasing the tax rate argue that carried interest is investment proceeds, and should be taxed like the proceeds of an entrepreneur who sells his business for a profit and gets capital gains treatment.

The Private Equity Growth Capital Council, an industry trade group, has called any potential tax increase “draconian” and said it would discourage risk-taking and slow investment into capital-starved companies.

But a number of high profile financiers, including Warren E. Buffett, have argued for closing what they view is a loophole benefiting the country’s richest taxpayers. Robert E. Rubin, the former Treasury secretary, has said that these proceeds should be treated as compensation for services performed, or ordinary income. Leon Cooperman, a prominent hedge fund manager, recently called the special treatment “ridiculous.”

The controversy over the carried interest tax first emerged in 2007. Democratic lawmakers introduced tax-reform legislation amid a populist backlash against the extraordinary wealth being created on Wall Street. The effort died in Congress after an aggressive lobbying effort from private equity and hedge fund firms.

Seeking to close the soaring budget gap, President Obama has introduced proposals in his budget to tax carried interest as ordinary income, but those also failed to get anywhere on Capitol Hill. A nonpartisan Congressional committee has estimated that the tax change would raise $24.6 billion over the next decade.

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