Smart Bombs: Get rich without a ‘job’

The reaction to Mitt Romney’s tax burden of 15.5 percent is predictable. Distressing, but predictable. The rich are not like you and me, according to the tax code. Why is this news?

Keep in mind that it was capitalism huggers, not “class warriors,” who forced Romney to divulge that information. So can we talk about this without resorting to rhetorical distractions, such as “envy” and “punishing success?” Good.

I am not jealous of Romney and neither is Newt Gingrich or Rick Santorum. They knew what the answer would be when they prodded Romney, because they’ve defended the tax code two-step that charges him less for “investing” than “working.” Those quote marks are necessary, because they have special meanings in his case.

When ordinary Americans go to work, they get something called a paycheck. From that, payroll taxes are deducted to finance Medicare and Social Security. From the remainder, we pay income taxes if the available deductions and credits do not lower our taxable income enough.

When Romney went to work at Bain Capital, where he accrued much of his fortune, he did not draw an ordinary paycheck. If he had, his income tax rate would’ve been 35 percent on much of his millions. But that’s not how it works when you’re a private equity manager. A recent NPR article explains:

“Many private equity managers are paid under a structure popularly known as ‘two and twenty’: They get a paid a fee that’s two percent of the assets under management, and they also get to keep 20 percent of the profits from their funds. That 20 percent is carried interest.”

“Carried interest” is taxed at the capital gains rate, which is 15 percent. The fee is taxed at the income tax rate. But Romney was unemployed last year (except for a few speeches here and there, for which he made a mere $374,000), so he was not paid any management fees. However, his Bain income was taxed at the capital gains rate because he worked out a special retirement deal in which his former employer agreed to payouts from the pile of money generated by investment gains.

Now it seems to me that being an equity manager is a job that entails creating those gains. In the lexicon of the tax code, it ought to be “ordinary” income, but it is not. What’s extraordinary is that this favoritism has withstood several challenges to end it. Then again, those who benefit from carried interest have plenty of money to sway the likes of Gingrich and Santorum.

Plus, it’s hardly news that many ordinary Americans insist on voting against their interests.

Tear this CODE down. Let’s imagine a scenario in which the top 1 percent of earners paid one-third of their income in taxes. It’s a common perception, so let’s make it true. One-third is a lot more than the average of 23.1 percent they paid in 2008. Let’s further suggest that stock dividends would go back to being taxed as ordinary income and capital gains would go back to being taxed at a top rate of 20 percent.

This is essentially the situation that existed for most of President Reagan’s eight years in office. Economist Bruce Bartlett, who worked for The Gipper, crunched the numbers on his New York Times blog and found that federal debt would be $1.7 trillion lower today. If the top income tax rate were returned to 50 percent, which is where it was for most of the 1980s, the debt would drop a lot more.

Now, nobody is suggesting a 50 percent income tax rate, but does altering the tax code to make it Reaganesque really fall into the category of socialism? Bartlett, a conservative, doesn’t think so:

“It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well.”

As Mitt Romney’s tax burden shows, the equitable reform of 1986 didn’t last long. Nonetheless, Romney noted in an op-ed column last year that “Reagan’s legacy is very much alive.”

His accountant, whose income is merely ordinary, must’ve gotten a chuckle from that.