Outrageous loophole in tax policy

Most people have heard that Mitt Romney pays a low tax rate because most of his income is from investing. But, surprisingly, he also pays this low rate on millions of dollars of compensation for services that he previously rendered at Bain Capital. By structuring his transactions to exploit a loophole for so-called carried interest, much of his compensation has been taxed at capital gain rates, as if it were from investment.

That loophole is available to a very few taxpayers in very limited industries. Proponents will tell you that because their income is tied to their results, they are taking the risk and deserve this tax break. But try to explain that to every commission salesperson, every lawyer who takes a contingent-fee case, and even every waiter and waitress. And all kinds of business people, from CEOs on down, get bonuses based on their results and the results of their companies, yet they don’t get the cheap rate. In fact, for most workers, if they don’t get results, they lose their job. But that doesn’t qualify their work for capital gain treatment.

Proponents argue that the companies in which private equity invests pay lots of taxes. Some do; others don’t. Why should that change compensation into capital gain?

Some proponents argue that their work is so important that they deserve this favorable treatment. Really? Surgeons, CEOs and even the president of the United States don’t get that treatment.

Romney has expressed contempt for the 47 percent who pay no income taxes. But you have to wonder how many of the other 53 percent would be offended if they understood that he is making millions of dollars of what is effectively compensation, but paying tax at a much lower rate than many typical workers.

David J. Roberts

Associate professor of accountancy

DePaul University