It’s little wonder that Republican presidential candidate Mitt Romney faced a precipitous drop in the South Carolina primary and generally in the popular polls. Not only did Newt Gingrich find traction among evangelical conservatives in that state (60% of all voters according the CBS), but former front-runner, Mitt Romney, made it clear that his massive wealth (estimated to be around a quarter of a billion dollars), and his seeming indifference to the distance and inequality from what most Americans experience, made him seem profoundly out of touch with the pain the rest of the nation was feeling. When born-wealthy Mitt trivialized what he had earned from public speaking – roughly $374 thousand over the past year – by calling that princely sum “not very much” and admitted that his overall federal income tax rate was “around 15%,” America winced. The actual rate, it seems, was 13.9% on $27.1 million of mostly investment income in 2011. The sad reality is that these rates applied even when Mitt was actually still working. How is this possible? Well, the tax laws were not written to benefit most of us, it seems.
The Internal Revenue Code is volumes and volumes of secret code, much of it written directly or indirectly by the very industries that it seeks to tax in order to create seemingly undetectable loopholes though which wealthy campaign and PAC contributors can pass… or even blatant tax benefits, such as those that grant industry-specific tax credits to encourage those business efforts over those of other sectors.
Some of that tax code appears to support outrageously high rates – like the 35% corporate income tax – except that the loopholes in the corporate tax code are so huge that major Fortune 500 companies, even those wallowing in profits, often pay token percentages – often under 10% – or even zero. By keeping their upside margins overseas on imports (the price paid at the source is significantly increased with a mark-up before the product is imported, so that the mark-up after the product is imported is kept low for tax purposes), companies can reduce their tax bite. By keeping their profits overseas – where they can invest or hire cheap (or expensive) foreign workers as opposed to Americans back home – American companies can keep those funds away from the carnivorous bite of the IRS. The list of loopholes is seemingly endless, and any chief financial officer of a big company that pays anywhere near the full 35% will be gone within seconds of filing such a tax return.
But even for earnings in the United States, our power elites have fashioned a tax code that benefits those who live off of investments or professionals who manage one or more forms of investment funds (e.g., private equity and hedge funds) at the expense of those who earn salaries and bonuses from ordinary jobs. For personal federal income taxes, most American pay somewhere between 15-20%, with the highest earners (with over $388,350 of taxable income) getting hit with a 35% marginal rate. But if you can get taxed at the 15% for appreciation of longer-term capital assets generated over more than a year (which I will simply call the “cap gains rate”), you would be paying taxes at one of the lowest rungs in our tax code. So if you could convert your high-falutin’ salary into some form of long-term capital gains, you could laugh all the way to the bank, pay taxes at a lower rate than your clerical assistants, and slorp at the trough of pig-driven excess! You would have “the moves like Romney.”
Forget about the “buy companies and lay-off workers” horrible that Mitt’s Bain Capital (their Boston headquarters is pictures above) is accused of doing. The above tax game is where the “Mitt Romney loophole” kicks in, how a senior partner in Bain can shelter a multi-million dollar annual compensation – money that he/she earns from their job at one of these big funds – and still pay taxes at “around 15%.” Fund managers generally get a token sum of their investors capital (often 2% per annum) as a management fee (from which they pay their operating costs), but they get 20% of the profits they generate for their clients, where the really money sits. They may also have some of their own money in such funds, so they get the benefit of any appreciation there as well.
So here’s how it works: “Because the manager is compensated with a profits interest in the fund, the bulk of its income from the fund is taxed, not as compensation for services, but as a return on investment [this is the essence of the loophole!!!]. Typically, when a partner receives a profits interest (commonly referred to as a ‘carried interest’), the partner is not taxed upon receipt, due to the difficulty of ascertaining the present value of an interest in future profits. Instead, the partner is taxed as the partnership earns income. In the case of a hedge fund, this means that the partner defers taxation on the income that the hedge fund earns, which is typically ordinary income (or possibly short-term capital gains), due to the nature of the investments most hedge funds make. Private equity funds, however, typically invest on a longer horizon, with the result that income earned by the funds is long-term capital gain, taxable to individuals at a maximum 15% rate. Because the 20% profits share typically is the bulk of the manager’s compensation, and because this compensation can reach, in the case of the most successful funds, enormous figures, concern has been raised, both in Congress and in the media, that managers are taking advantage of tax loopholes to receive what is effectively a salary without paying the ordinary 35% marginal income tax rates that an average person would have to pay on such income.”
There are several bills in Congress that would eliminate this industry-specific loophole to end the ability of individuals performing investment adviser, fund management or similar services to partnerships or other company structures to receive capital gains tax treatment on their income. After all, it’s what they do to earn a living, so why should a particular category of earnings be taxed at an entirely different rate from the rest of us? Sigh, but if you are able to ascertain where the big anti-tax PACs are being funded, not to mention the bulk of serious campaign contributors to the Tea Party candidates, you might find… hell, you will find… that these are precisely the beneficiaries of this lovely cap gains rate being charged against their earnings. “No new taxes” is a whole lot different when you really look behind the meaningless slogan… and you know that all those who “signed the pledge” are nothing more than stooges and front men for these mega-wealthy tax pariahs.
I’m Peter Dekom, and unfairness is most certainly not the American way.
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