Much ado has been made about attacks on Mitt Romney regarding his time as CEO of Bain Capital. I’m already on the record as stating that an attack on Bain Capital is not an attack on capitalism itself and that being pro capitalism is not the same as being pro business. Most businesses would gladly accept regulations that interfere with capitalism but give them some leg up.
The real problem that Mitt Romney has with his Bain Capital years is intertwined with his refusal to date to release his tax returns. You see, Mitt Romney has more than likely benefited from an egregious tax loophole that lets private equity managers have most of their compensation taxed at the capital gains rate (15%) which is significantly lower than the income tax rates. The capital gains tax rate is lower because presumably the gains made by investors are from investments made with after-tax money. But this loophole allows private equity managers, who use other investors’ money to have this preferred tax rate.
In a typical private-equity fund, the managers get paid two per cent of assets as a regular fee, plus twenty per cent of the fund’s profits. They pay regular income tax on the two per cent. But on their share of the profits, which is called “carried interest,” they usually pay only long-term capital gains—even though they put up hardly any of the fund’s actual capital, most of which comes from outside investors. The difference in tax rates saves private-equity managers billions of dollars a year, and means that they pay taxes at a much lower rate than, say, your average lawyer.
That’s why it’s not surprising the Mitt Romney recently said that he pays about 15%. For some perspective in 2010 after I got all my deductions for my mortgage, my two kids, childcare, healthcare, etc. I paid an effective rate of 14.22% and I’m just a white collar executive making a decent salary, not a multi-millionaire like Romney. Currently the highest marginal income tax bracket is for income earned in excess of $379,150 and people fortunate enough to make that much pay 35% on every dollar they earn over that amount. In short, Mitt Romney probably paid far less than he should have on his compensation and it was all very legal.
The problem with Bain is not that Mitt Romney became wealthy by closing factories and plants in the US (although that’s not a virtue either), it’s that Mitt Romney has taken great advantage of the archaic tax and regulatory structures to do it. This is not capitalism. In capitalism, we would have a simplified and fair tax code that treated everyone the same. Should Mitt Romney go to jail for doing what we all do every year, try to minimize our income taxes? No, of course not. But perhaps voters in November won’t be easily convinced that Mitt Romney’s tax strategy is the most noble of traits.