Romney's confounding position on carried interest

@CNNMoney June 18, 2012: 7:17 AM ET
Romney's confounding position on carried interest

Mitt Romney and his campaign have offered only muddled statements on carried interest.

NEW YORK (CNNMoney) -- What does Mitt Romney really think about carried interest?

The tax break, which benefits private equity partners, continues to save the Republican presidential candidate millions of dollars in taxes after a pioneering career at Bain Capital.

Romney has, in the past, explicitly called for keeping the tax benefit in place. But this election cycle, even when asked directly, the candidate has not clearly articulated a position.

Campaign staffers have added to confusion over the candidate's position, occasionally suggesting that Romney would, once elected, consider rolling back the tax break. At other times, the campaign has walked those suggestions back.

The tax treatment of carried interest, an obscure compensation method used primarily in high-stakes finance, has long been a hot topic in Washington and on Wall Street.

Carried interest benefits hedge fund managers, venture capitalists and private equity specialists, who are awarded a share of fund profits as compensation. The profits, which often make up a substantial share of a manager's income, are taxed at the capital gains rate of 15%.

Ordinary income, which salaried workers receive in the form of a paycheck, is taxed at a top rate of 35%.

The discrepancy has long attracted critics who argue that carried interest amounts to nothing more than ordinary compensation for services and should be taxed as such.

Supporters counter that carried interest is investment income and derives from activities that carry significant risk. A lower tax rate is needed to encourage entrepreneurial activity and investment, they say.

The Obama administration, for its part, has proposed raising the tax rate on carried interest.

It is not clear exactly how much Romney has benefited from the tax break in dollar terms, but two years of tax returns released by his campaign indicate the tax treatment likely played a large role in amassing a fortune possibly worth more than $200 million.

Romney made $42.7 million in 2010 and 2011, according to the returns. Of that, $12.9 million was carried interest. Over the two years, Romney's effective tax rate -- the percentage of his income that he owed in federal income taxes -- was 14.5%.

The low tax rate quickly became fodder for Romney's political opponents, including other Republicans, who sought to portray the former Massachusetts governor as an out-of-touch financier.

But Romney's position on carried interest, the tax break that helped keep that tax rate low, escaped scrutiny for the most part.

During Romney's failed campaign for the Republican presidential nomination in 2007, there was no mystery about Romney's thoughts on carried interest.

"With regard to carried interest associated with venture capital, real estate, private equity, I do not believe in raising taxes," Romney told an interviewer.

"It is a capital gain because those individuals do make an investment," Romney said. "I would treat capital gains as capital gains instead of trying to re-categorize them as normal income."

The candidate's position is much less clear this cycle.

Lanhee Chen, Romney's policy director, told reporters during a January conference call that the candidate might be willing to reconsider his position on carried interest, provided the tax increase was part of comprehensive tax reform.

But that same day, the Wall Street Journal reported that campaign advisers walked back Chen's remarks, saying that Romney "didn't want to raise anyone's taxes."

Exactly one month later, the Romney campaign held another conference call to reveal a new plan to cut marginal tax rates by 20%. During the call's question-and-answer session, Romney economic adviser Glenn Hubbard, a professor at Columbia University, once again suggested the candidate might be willing to modify the tax treatment of carried interest.

Should he become president, Hubbard said, Romney would instruct his Treasury secretary to study the issue to determine if a higher rate was appropriate.

Hubbard's comments fell short of a full reversal of Romney's position, but suggested the candidate was open to the idea of hiking taxes on carried interest.

But given the campaign's previous denunciation of similar comments by a staffer, it was difficult to determine just how serious the candidate was about the course of action suggested by Hubbard.

In March, Romney himself was asked about carried interest during a live interview broadcast on CNBC, but his answer shed little light on his plans for the tax break.

"I think you have to look at each dimension of our income streams and ask, is this a true capital gain or is it ordinary income" Romney said before calling for a consistent application of the tax code.

But Romney also said the court system and the Internal Revenue Service should determine what constitutes investment income, suggesting he believes that tinkering with the tax code is outside the executive's purview.

"I don't believe that it's Congress' job or an Administration's job to go through and say 'hey these people are making too much money, let's change their tax rate to make them less able to be financially successful,' " Romney said.

Both the Romney campaign and an outside economic adviser did not respond to repeated calls and e-mails from CNNMoney seeking clarification of the candidate's position.

The campaign's lack of specificity on carried interest underscores a trend running through much of the candidate's tax plan.

Romney is campaigning on the promise of large tax cuts, and says he will make up for the lost revenue by limiting deductions, exemptions and credits currently available to top-level income earners.

But he has yet to lift the curtain on which deductions he is planning to curtail. To top of page

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
View rates in your area
Find personalized rates:
Economic Calendar
Latest ReportNext Update
Home pricesAug 28
Consumer confidenceAug 28
GDPAug 29
Manufacturing (ISM)Sept 4
JobsSept 7
Inflation (CPI)Sept 14
Retail sales Sept 14
  • -->

    Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.