Mitt Romney — due, in part, to a tax loophole that benefits wealthy money managers — is able to drive his tax rate down to 15 percent, below that of many middle-class families. That tax loophole, which allows money managers to pay the capital gains tax rate of 15 percent on income they are paid for investing other people’s money (known as “carried interest”), saved Romney $2.6 million in taxes in just the last two years.
Democrats, including President Obama, have proposed closing this particular tax loophole for years. The Romney camp, when it rolled out its second major tax plan just a few weeks ago, said that it would examine whether or not it would eliminate the break, with economic adviser Prof. Glenn Hubbard calling it a “devilishly hard question.”
But evidently the campaign is leaning away from closing the carried interest loophole, as another Romney economic adviser, Prof. Gregory Mankiw, penned a piece in yesterday’s New York Times largely defending it. While admitting that “some reform may well be appropriate,” Mankiw lays out some scenarios under which a carpenter plays the role of the Romney-type money manager, making carried interest for the work he put in renovating a home. The New Republic’s Alec Macgillis, rightly, isn’t buying it:
[Mankiw] did an impressive job of muddying the water around a question that truly is as as clear-cut as they come: why should investment managers have the compensation for their labor taxed at a far lower rate than all other professionals? You’ll have to read it to believe it, but Mankiw’s trick is to bring in the more sympathetic example of a carpenter who teams up with an investor on a real estate project that turns a profit. Under current law, the carpenter’s share of the profits are taxed as capital gains, just as the investor’s are, even though in the carpenter’s case what he was putting into the project was his sweat equity, not an investment stake. If the carried interest loophole were closed, notes Mankiw, the carpenter would be taxed at a far higher rate than the investor he teamed up with. Well, yes — but that’s only because we tax capital gains at a much lower rate than ordinary income. If Mankiw is so bothered by the carpenter’s fate after the closing of the carried interest loophole, then he should be pushing for the equalization of the tax rate for investments and earned income.
Indeed, the concern Mankiw expresses for the carpenter could be alleviated simply by shrinking or eliminating — as Ronald Reagan did — the difference between investment taxation and wage taxation. Reagan, in fact, equalized the two entirely, even though conservative dogma says that a lower capital gains rate is necessary to incentivize investment.
Two-thirds of Americans have said that the carried interest loophole should be closed. And once upon a time, Mankiw seems to have counted himself amongst that group. Now though, Mankiw and the Romney camp seem to favor obfuscation of an easy question, in order to avoid the conclusion that Romney and other money managers are benefiting from a tax loophole that simply needs to go.