Why do the rich — like Mitt Romney — pay a lower tax rate than the rest of us working stiffs?
What is the carried interest loophole, and why doesn’t Romney want to close it?
By Dylan Matthews, WashPost, Updated: August 15, 2012
In an interview in Fortune Tuesday, Mitt Romney ducked a question about whether he’d close the “carried interest loophole,” which allows hedge fund managers and other executives at investment firms – such as Bain Capital executive Mitt Romney – to pay lower capital gains tax rates on their wages, rather than the regular income tax rates.
“What I’ve said in the past is that if something is a capital gain it should be treated as a capital gain,” Romney responded. “If something is ordinary income it should be treated as ordinary income.”
But that’s exactly the issue — are the earnings of hedge fund and private equity executives ordinary income, or are they capital gains? In the past, the Romney campaign has signaled that Romney wants to repeal the deduction, indicating he thinks the executives’ earnings are ordinary income, not capital gains. But the question isn’t clear-cut.
Typically, if you draw a wage — you work at a company, get a paycheck, etc. — that’s counted as ordinary income, whereas if you buy an asset like a stock or house and then sell it for more than what you paid, that’s a capital gain, taxed at a lower rate. Currently, the top capital gains rate is 15 percent, set to increase to 18 percent if the Bush tax cuts aren’t extended. Compare that to the 35 percent current top income tax rate, or the 39.6 tax rates if the tax cuts expire.
(More here.)
In an interview in Fortune Tuesday, Mitt Romney ducked a question about whether he’d close the “carried interest loophole,” which allows hedge fund managers and other executives at investment firms – such as Bain Capital executive Mitt Romney – to pay lower capital gains tax rates on their wages, rather than the regular income tax rates.
“What I’ve said in the past is that if something is a capital gain it should be treated as a capital gain,” Romney responded. “If something is ordinary income it should be treated as ordinary income.”
But that’s exactly the issue — are the earnings of hedge fund and private equity executives ordinary income, or are they capital gains? In the past, the Romney campaign has signaled that Romney wants to repeal the deduction, indicating he thinks the executives’ earnings are ordinary income, not capital gains. But the question isn’t clear-cut.
Typically, if you draw a wage — you work at a company, get a paycheck, etc. — that’s counted as ordinary income, whereas if you buy an asset like a stock or house and then sell it for more than what you paid, that’s a capital gain, taxed at a lower rate. Currently, the top capital gains rate is 15 percent, set to increase to 18 percent if the Bush tax cuts aren’t extended. Compare that to the 35 percent current top income tax rate, or the 39.6 tax rates if the tax cuts expire.
(More here.)
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