The “carried interest” loophole

[basil]

Currently, the tax code imposes a top rate of 15 percent on investment income — generally, capital gains and dividends — that flows overwhelmingly to wealthy taxpayers. In comparison, top rates between 25 percent and 35 percent are applied to the wages and salaries for many working Americans.

Worse, an egregious loophole in the law lets private equity partners pay the lower 15 percent rate on much of their income — known as “carried interest” — even though those earnings are not typically gains from investing their own money, but rather a share of profits from investing someone else’s money.

President Obama has repeatedly called for ending the carried interest loophole.

Mr. Romney has called for keeping the current low rates for capital gains and eliminating capital gains altogether for taxpayers making less than $200,000. That’s an attempt to justify an indefensible tax break for the wealthy by tossing crumbs to others.

Mr. Romney does not have to apologize for his wealth. But he cannot keep trying to conceal just how much the tax code has been tilted in his favor.

[eklars]

I hear you on the carried interest loophole, but that largely goes to lawyers so its tough tough tough to get rid of.

Cap gains is here to stay and is just. Why? One, because of the risk of loss. When you buy a company or stock you might loss every penny, a risk not shared by society as a whole. Employees who wonder why they don't make what the owner makes have one big reason staring them in the face, risk. Employees only risk is the risk of termination, not the loss of everything you own.

Second, capital investment is what makes jobs. The reason its called capital gains is because it is based on capital equipment, which pretty much always requires that you create or sustain atleast some jobs.

Third, cap gains will never go up, we can't afford it. The reality is that the economy is driven by both consumption and investment, we need both. Sure there needs to be a balance, but what you don't want to accept is that we have already decided as a nation that investment needs to encouraged over consumption. (if you haven't read anything on Keynes don't even respond to this)

Arguments against: Yes it goes to the wealthy, they are the ones with wealth to invest. Yes everyone else pays higher average rates. Both true.

[eklars]

Also, real life example. If I had to pay the top marginal rate for reals on my businesses earnings I would never had done it. I pay about 16% net taxes (including personal property, CO state tax, Federal, social medicare etc). If I paid the 40% the left thinks I ought to pay I wouldn't be employing 60 people because I would barely be able to recoup my investment and get little to nothing in return for my risk, time, and capital. The reason my taxes are so low is partly because of deductions related to my investment and recovering that investment.

I'm not saying all employers deserve the lowest rates, but ultimately the people who make the capital investments that create the jobs most of the readers of this post hold need to take home enough money that they might actually want to keeping doing it.

[basil]

I'm not arguing against capital gains, I'm arguing against the “carried interest” loophole.

[eklars]

Left and right meet!

[gh]

Romneys main supporters are financial instutions. Hence the dodge. My opinion is that capital gains should go back to where they were before the Bush tax cuts. The argument above about risks justifying the lower rate is crazy.

Romney campaign dodges tax question - The Term Sheet: Fortune's deals blog Term Sheet

[eklars]

The hallmark of a good rebuttal, just "crazy".

That and it doesn't matter what the argument is because you can't beat off the entire financial services industry. Cap gains acts as a stimulus on investing in stocks for most people, I'm the exception as a small business owner.

Anyway, enjoy liberalism. Rest assured you are no match for your opposition and we are all just humoring you. Your making a difference and aren't just a cog in someone else's clock!! Yeah!

[gh]

Cap gains do act as a stimulus to invest but has nothing to do with risk so your statement previously is crazy to me or simply makes no sense. You can invest any way you like from extremely safe investments to very risky investments. There are about a million mutual funds to cater to your risk profile. All you have to do is keep them a year and you have capital gains. However if you fail you can write off the loss to counter your gains so capital gains has zero to do with risk. It does however create a stimulus for investing, it is however low due to the Bush tax cuts which he did to cater to his base, the wealthy.
Romney however had almost all of his income taxed as capital gains since he used the carried interest loophole. This had nothing to do with risk as the risk was on other people and this was his regular earnings on managing other peoples money which is wrong. Should have been taxed at his regular rate.

[eklars]

Here is the best description ever of what this thread is on about. Read the excerpt and then the link:

Imagine that you are self-employed. Every year, you earn $100,000, pay 35% in taxes and have $65,000 left in your pocket. Now you form a corporation. $100,000 goes into the corporation. There is a corporate tax rate of 25%, so that leaves $75,000 which you pay to yourself as a dividend which are taxed at 15% which leaves you roughly $65,000. So sure, you could say that your tax rate was 15%, but that would be nonsensical. Nothing of significance has changed. What about if you get a partner and the corporation earns $200,000 paying $65,000 to each of you? Well, what changed? Nothing.

Mankiw is right. Buffet is wrong. | PrometheeFeu's Blog

[gh]

Form an S class corporation and it nullifies the double taxation and since you started this comment with false data I assume the link is bad too. 100k is in the 28% tax bracket not 35% but that would lead to an effective tax rate that would be lower. And absolutely none of this comment has anything to do with carried interest which is not subject to double taxation, its just the loophole to get a 15% tax rate on all returned income.

2012 tax brackets 2012 Federal Income Tax Brackets (IRS Tax Rates) - Forbes