Mitt Romney has achieved a seemingly unparalleled feat in the context of the 2012 presidential campaign: he’s united former governor Sarah Palin and President Obama around a common cause. Both have recently called on the former Massachusetts governor and Bain Capital co-founder to make his income tax returns available to the public.
Thus far, Mr. Romney has broken with recent precedent for presidential campaigns and refused to release his tax returns.
The recent disclosure of the executive compensation packages of another prominent private equity firm, the Carlyle Group, together with the overwhelming, broad-based public support for the “Buffett Rule,” may shed some light on Mr. Romney’s unusual decision.
Howard Gleckman of the Urban-Brookings Tax Policy Center has written how the Carlyle disclosure has revealed new information about how multi-millionaire private equity executives are able to pay a far lower tax rate than many middle class families by taking advantage of the carried-interest tax loophole (aka “the carry”):
The carry allows general partners in investment deals to receive compensation in the form of tax-advantaged capital gains, which are taxed at 15 percent, rather than as salary, which would be taxed as ordinary income with a top rate of 35 percent. This happens because the managers are paid with a fee (up to 2 percent) plus 20 percent or more of their investor’s profits. Those profits are taxed as capital gains even though the general partners may have little or no money of their own at risk in the deal.
Carlyle’s disclosure opens a small window into how this works. In 2011, its three founders were each paid about $140 million. But they received just $275,000 in salary and another $3.5 million in the form of a bonus (also taxable at ordinary income rates). But each also got $134 million—or 96 percent of their compensation–from investment profits. Much came from the carry and is taxable at 15 percent.
It is difficult to know exactly how much of that compensation was performance-based and how much came from fees. But if all of it were taxed as capital gains, and assuming the partners pay at the top ordinary income rate of 35 percent, they’d each save $27 million.
If Mr. Romney’s tax returns were to show that he, as is likely the case for the Carlyle Group executives, paid an effective federal tax rate of only 15 percent despite earning millions, it could help build momentum for putting an end to an unjustified tax loophole that’s end is long overdue.