Carried Interest Debate in Spotlight Amid Romney Tax Release

Democrats are reviving efforts to end a tax break for private-equity and hedge-fund executives as Republican presidential candidate Mitt Romney’s tax return shows he used it to help limit his 2010 tax rate to 13.9 percent.

Representative Sander Levin and Senator Carl Levin, brothers and fellow Michigan Democrats, said today they are introducing legislation in their respective chambers. Carl Levin said the higher revenue could be used to help avoid $1.2 trillion in across-the-board spending cuts set to begin taking effect in 2013 under last year’s debt-reduction agreement.

“The public wants loopholes-closers, and the Romney tax returns are a poster child of these loopholes,” said Carl Levin, chairman of the Senate Armed Services Committee. The senator plans to introduce a measure to increase revenue and favors limiting the tax break, his spokesman Gordon Trowbridge said in an e-mail.

Romney, who made a fortune of as much as $250 million in the private-equity industry, paid an effective tax rate of 13.9 percent on income of $21.6 million in 2010, according to his tax return released today. That compares with the 35 percent top marginal tax rate.

“The fact that one of the leading Republican presidential candidates benefited to such a significant extent from this egregious loophole only further illustrates the need to address this issue once and for all,” Sander Levin, the ranking Democrat on the House Ways and Means Committee, said in a statement.

Carried Interest

At issue is the tax code’s treatment of carried interest, or the share of profits that partners in private equity firms, hedge funds and real estate developments receive as most of their compensation. That income is taxed at the 15 percent capital gains rate rather than at ordinary income rates.

Senator Mike Crapo, an Idaho Republican, said regarding proposals to raise the tax on carried interest, “I don’t think there’s many economists would say that’s a good idea right now.”

“We’ve been having these arguments for a long time, and I don’t expect that the politics of the presidential races are going to change that,” Crapo said.

Even so, Democrats said they will push to include the issue in negotiations over extending a payroll tax holiday scheduled to expire at the end of February.

“There’s no reason that hedge fund managers and private equity guys should be getting a 15 percent rate when they don’t put a dollar of their own capital in,” said Representative Chris Van Hollen, a Maryland Democrat.

‘Not Fair’

The Obama administration and congressional Democrats are seeking to benefit from the debate over the carried interest provision. President Barack Obama views the tax break as a “loophole” that is “just not fair,” White House Press Secretary Jay Carney said last week.

The renewed effort to tax carried interest as ordinary income may get a boost from Obama’s State of the Union address tonight, which will include a theme of economic fairness.

For Obama and congressional Democrats, the issue’s appeal is more symbolic than substantive. There is almost no chance that a divided Congress this year would raise the tax rates that apply to such income. Still, the notion that some of the nation’s richest individuals pay lower tax rates than millions of typical Americans dovetails with rising public concern about the gap between rich and poor.

Pew Poll

A Pew Research Center poll earlier this month found that 66 percent of Americans saw a sharp conflict between rich and poor, up from 47 percent in 2009. The largest increase in such sentiments was among self-described independent voters.

Some Republicans defended the provision as an incentive for business investment and said any move to eliminate preferences should be part of a comprehensive rewrite of the tax code.

“We want to look at the entirety of the tax code and put it through intense examination” because “the demand is coming from multiple quarters to do tax reform,” said Representative Charles Boustany, a Louisiana Republican and a member of the tax-writing Ways and Means Committee.

Georgia Republican Tom Price, another member of the panel, said increasing the tax on carried interest would harm job-creation.

“If that’s what the Democrats want to do, let them have it, but that’s the wrong thing,” Price said.

Senator Kent Conrad, a North Dakota Democrat, said public opinion is turning in favor of changing the carried interest rate.

“I was just home for a week, I did 30 events and virtually everywhere I went, people were talking to me, ‘how can it be that somebody earning millions of dollars pays a lower tax rate than we do,’” he said. “The public has got their interest level up and they’re understanding better how it really works.”

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