The fallout over US presidential candidate and Bain Capital co-founder Mitt Romney’s tax returns continued at the World Economic Forum in Davos this week, where The Carlyle Group co-founder David Rubenstein defended the private equity industry against the perception that its leaders cheat on their taxes.
“They are paying the taxes … everybody’s paying their taxes. If you change the law they’ll pay the taxes. Romney simply said — I’m not his defender — said he’s paying whatever the law required. If you want to change the law, change the law, but don’t criticise him for paying the taxes that the law requires him to pay,” Rubenstein said while participating in a debate on capitalism.
Rubenstein’s comments came after fellow panelist Sharan Burrow, General Secretary of the International Trade Union Confederation, said the private equity industry should “pay the taxes. Stop cheating on what is already a requirement”.
If you want to change the law, change the law, but don't criticise him for paying the taxes that the law requires him to pay
The private equity industry has come under heavy scrutiny as Romney has emerged as one of two frontrunners for the Republican nomination. Earlier this week, Romney released his tax returns for the last two years, which indicate that he paid an effective tax rate of 13.9 percent in 2010 and expects to pay a 15.4 percent rate on his 2011 earnings. According to reports, the majority of Romney’s income comes from a share of profits and returns from Bain Capital, as well as other investment income, which is taxed under the 15 percent capital gains rate.
Profits from funds, known as carried interest, earned by general partners are taxed under the capital gains rate, which many critics say is unfairly regressive, as regular top-bracket income is taxed at 35 percent. Many Democrats, including President Barack Obama, have argued that carry should be taxed at a rate of 35 percent.
Obama highlighted the issue in his State of the Union address, less than a week after Democratic Representative Sander Levin announced that he would reintroduce legislation to the House of Representatives that “fixes the carried tax loophole”.
“Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes,” Obama said in his address. “If you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions.”
At Private Equity International’s annual CFOs & COOs Forum in New York last week, Deloitte partner Edward Daley said the recent attacks may force Republicans to compromise on their long-maintained stance that carried interest should be taxed at the capital gains rate. According to Daley, Republicans may want to make private equity – and the 15 percent tax on carry – a non-issue in time for the general election if Mitt Romney secures the Republican nomination.
Carlyle’s co-founders also made headlines in regards to their earnings recently. According to a US Securities and Exchange Commission filing, Rubenstein and fellow co-founders Daniel D’Aniello and William Conway collected big payouts, taking in about $134 million apiece in cash distributions from the firm. The founders also each received about $3.8 million in total compensation in 2011, consisting of base salaries of $275,000, bonuses of about $3.5 million and compensation in the form of retirement account contributions from the firm.