Republicans may cave on carried interest

For an industry that savours its privacy, private equity has been forced into a very public role during the ongoing US presidential campaign. Recent high-profile attacks on the industry, specifically on Republican candidate Mitt Romney’s tenure at Bain Capital, is putting pressure on policymakers to reexamine efforts to increase the tax on carried interest. 

The ranking Democrat on the House of Representatives Ways and Means Committee, Sander Levin, recently announced that he would reintroduce legislation to close what he calls “the carried interest loophole”. 

“Gov. Romney’s statement that his tax rate is close to 15 percent likely reflects that he has benefited from a loophole that we have been trying to close for years,” Levin said in a statement. “In 2007 I introduced legislation to close that loophole and it has passed the House four times as part of broader measures. When Gov. Romney says his tax rate mostly reflects returns on his own investment, he needs to clarify how much this is truly money that he invested himself and how much is carried interest income that he earned managing other people’s money.”

Mitt Romney

Meanwhile Republicans, who have thus far been able to block a carried interest tax hike in the Senate, “feel pressure to take this off the table as an election issue,” said Deloitte partner Edward Daley at Private Equity International’s annual CFOs & COOs Forum in New York. “It’s likely this will come up as a way to pay for [keeping the payroll tax cut in place].”

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, assuming that Mitt Romney secures the Republican nomination. Extending the payroll tax cut through the end of 2012, which is set to expire in February, will require the federal government to make up revenue by increasing different taxes or instituting cuts.

Recent attacks on the industry may create an environment where more Republicans are willing to sacrifice their long-held stance on carry, that it should be taxed at the capital gains rate of 15 percent. Democrats, including President Barack Obama, contend that carry should be taxed at the same rate as ordinary, top-bracket income, which is currently 35 percent.

The capital gains rate was thrust into the spotlight earlier this week when Romney, who is estimated to be worth around $250 million, told a crowd of voters in South Carolina that his effective tax rate is around 15 percent. 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.