In theory, Mitt Romney is the beau ideal of a CEO President: the pioneering leader of Bain Capital who attained enormous success in business and government, and whose signature skill—turning around troubled companies—is a sterling credential in a time of economic stagnation. George W. Bush once claimed to be the MBA President, to everyone’s eventual embarrassment. Romney’s the real thing, which is a big reason why he came to be seen by voters as the most electable Republican.
Sure enough, his career has become the central issue in the campaign. But the focus hasn’t been the appeal of an executive applying his knowhow to government. Instead, attention has fallen mainly on the collateral damage inflicted by private equity firms and the preferential tax treatment given to those who have amassed fortunes running them. Rather than standing for what’s best about business, Romney is being held up as typifying what’s worst.
That’s tarnished the mythology of the businessman as President, and could force Washington to act against the very executives who are his most fervent supporters. Romney may even inadvertently bring about what liberal reformers have tried and failed to achieve for years: a tax code that imposes a much heavier share of the burden on people like him.
At the heart of the debate lies a loophole—the carried-interest provision—that allows private equity executives like Romney to treat their income as capital gains taxed at a rate of 15 percent, rather than the 35 percent top rate that applies to ordinary income. Many Democrats and a few Republicans regard this as an unconscionable sop to the rich. When they controlled the House from 2007-2010, Democrats passed legislation four times to end it. But reform has never advanced, partly because senators—including some Democrats—have interfered. (Wall Street is a major source of Democratic campaign contributions.) When carried interest first came up as a political issue five years ago, Senator Charles E. Schumer (D-N.Y.) killed any chance of reform by insisting that any law threatening the loophole also apply to investment partnerships in other industries, such as oil and mineral exploration. That caused a broad enough outcry from financiers to stop the bill, and the issue fell into limbo.
Romney has changed that. His 2010 and 2011 tax returns, released under duress on Jan. 24, show he paid a rate of just 13.9 percent and made $13 million in carried interest—this during a period of self-described “unemployment.” Overnight he came to personify the special treatment given to the rich, putting a name, face, and tax return to what had previously been an abstraction. “His tax forms show the inequity of that exemption,” says David Min, a former counsel to the Senate Banking Committee who is now a scholar at the liberal Center for American Progress. “At this point, I don’t think anyone wants to be publicly opposed to ending it.”
Romney’s inability thus far to convincingly explain how his business experience would benefit the country, coupled with attacks from his primary opponents, has taken a significant toll; exit polls from the South Carolina primary show that the victor there, Newt Gingrich, is now seen as the more electable candidate. Meanwhile, prominent Republicans are distancing themselves from breaks such as the carried-interest deduction. In the Republican response to Obama’s State of the Union address—a speech highlighting the contrast between the rich and the middle class—Indiana Governor Mitch Daniels called for measures to “stop sending the wealthy benefits they do not need, and stop providing them so many tax preferences that distort our economy and do little or nothing to foster growth.”
The current assumption in Washington is that little of importance will happen this year, and that tax reform won’t be addressed until 2013. But that’s not certain. One thing everyone agrees must happen is the extension of the payroll tax cut; negotiations are just under way. Public furor and the partisan advantage to be gained by making an issue of Romney’s tax treatment all but ensure that ending the carried-interest provision will at least be a part of those discussions. Should that fail, Senate Democrats are likely to force a vote on a stand-alone bill, and this time Schumer has already declared his support.
There remains the obstacle of the filibuster. That’s ultimately what blocked reform in 2010, when Democrats in the House and Senate had finally agreed on a compromise. “The private equity people would have gotten a good hosing,” says John L. Buckley, a professor of tax law at Georgetown University, who was the chief Democratic counsel on the House Ways and Means Committee at the time.
Still, high-profile events have a way of seizing attention and concentrating efforts in Congress. Private equity didn’t even register as a Washington concern until 2007, when Stephen A. Schwarzman, the billionaire co-founder of Blackstone Group (BX), threw himself a notoriously lavish 60th birthday party. Soon afterward, Senators Chuck Grassley (R-Iowa) and Max Baucus (D-Mont.), appalled that private equity partnerships like Blackstone could avoid corporate taxes and still go public, introduced legislation to stop them. Now, Romney’s candidacy has again brought new scrutiny to the world of private equity. It’s a good bet that, one way or another, Congress will try to bring the party to an end.