Left Should Challenge Obama, Not Romney, on Carried Interest

Originally Published on forbes.com on January 20th,2012

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Criticizing Romney for paying an average rate of 15% is ridiculous.  Given that his main source of income is venture capital, it would have been surprising if it was anything different.  Most businessmen I know think it is irresponsible to overpay your taxes.  I suspect that this is close to a universal sentiment.  Learned Hand said it best:

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

As my esteemed editor Janet Novack has pointed out, under the Gingrich plan Romney’s rate would be more like 0%.

Cure is Worse Than the Disease

“Carried interest” is sometimes characterized as a “loophole”.  I would like there to be a rule that anybody who wants to talk about carried interest who does not understand partnership taxation and is unwilling to learn, should just shut up.  Here is a good question to ask somebody who acts as if they know about “carried interest” ? What Code Section has to be changed to fix the problem ?  It is a trick question.  The proposed fix is a new section.  Proposed Code Section 710, in this particular manifestation, runs three thousand words and in the opinon of former ABA Tax Section Chair Charley Egerton :

The bulk of the revenue will not come from hedge fund managers.  It will come from mom and pop real estate operators.

The revision of Proposed Code Section 710 in the Jobs Act did not do quite as much collateral damage, but, as I explain here larger venture and hedge funds will probably be able to beat it by tweaking their asset mix.

It is fine to say that Obama opposes “carried interest” and has backed legislation that has no hope of passing, until you actually look at the legislation and realize that it is awful and probably does not address the issue.  If something is a “loophole”, it does not take another 3,000 words to close it.

What Can Be Done ?

If the President really thinks that “carried interest” is such a great abuse, why does he not tell the IRS to address it by regulation ? There is already aTax Court decision, in favor of a venture capitalist who wanted an ordinary deduction, that might support that decision.  Even if the regulation ultimately did not stand up in court the President would be able to challenge Romney on it in the campaign.  The answer might be hypocrisy.  Putting forth legislation that will not pass is one thing. Actually doing something is another and as Nathan Vardi points out prominent Democrats including the Clintons benefit from private equity.  Personally I do not think the “carried interest” break is that big a deal.  I don’t see that much distinction between it and founder’s stock.  If you really think it needs fixing, though, it is the current President who is responsible.