Economics, Taxes and Spending

Romney rips the Buffett Rule tax

A blockbuster Mitt Romney interview last night on CNBC’s Kudlow Report.

First, Larry Kudlow asked Romney about this bit from Barack Obama’s State of the Union address: “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.”

This is aimed at people like Romney, whose tremendous annual income derives mostly from investments, and thus they pay a 15 percent capital gains tax rate rather than a 35 percent top marginal rate on labor income. Here is Romney’s response to Kudlow’s question about the Buffett Rule:

What capital gains tax breaks have done over time is recognize there are two levels of taxation in capital gains: one at the corporate level, which is a 35% rate, and another at the individual level, which has been 15%. So combined it’s about a 50% tax. So if you’re going to say we’re going to raise that dramatically, you’re going to choke off a lot of the capital that goes into creating new enterprises and creating jobs.  … You’ll choke off the growth of America’s economy.

Game on. Second, Romney talked about carried interest, the performance fee some investment managers receive. There had been a suggestion by Team Romney that he might be considering changing its 15 percent tax treatment as part of tax reform should he become president. Again, Romney:

My view is that we don’t raise taxes on anyone. I’m not looking to single out some group of people and say let’s raise taxes. If it’s actually a capital investment and it’s fairly priced at the time people invest in it and it rises in value as a capital gain, then you treat it as a capital gain. If someone turns it into what looks like ordinary income or a bonus, obviously it’s not a capital gain. But you don’t single out one kind of capital gain for treatment from other types of capital gains.

Not sure what to make of that, maybe because carried interest is a weird bit of income. As IBD’s great Jed Graham wrote the other day:

The private equity industry has defended the capital gains treatment, in part, by noting that carried interest is subject to risk. If the fund doesn’t increase in value, there is no payment. In reality, carried interest has characteristics of both regular income and investment income. Take an example: Say a fund increases nearly 15% a year for five years, doubling in value. The carried interest will be worth 20% of the original investment. Thus, it is as though the private equity managers received an upfront payment equal to 10% of the original investment and earned an equal 10% by putting that money to work. Thus, in this example, half of carried interest bears a close resemblance to regular income, while the other half seems like investment income.

Third, Romney also said for the first time that he will almost definitely unveil a “phase two” tax reform plan during the primary season.

Kudlow: Are you going to come out with a phase two tax reform plan to say to people specifically, “Here is what I’m going to do?”

Romney: Absolutely. Phase one is immediately saying to people making $200,000 a year and less, no tax on your savings. No tax on interest, dividends, or capital gains. And also phase one, get the corporate tax rate … down to 25 percent. That’s phase one. Phase two is to broaden the base, that means get rid of deductions and exemptions and loopholes and bring down the rates the way Bowles-Simpson did, not identical to Bowles Simpson. We’re working on various models to bring our rates down, and we’ll be able to make some choices in that regard.

Kudlow: When is phase two coming out?

Romney: It’s not ready yet, but it will be ready at some point.

Kudlow: Will it be ready during the primary season?

Romney: I presume so.

Now, of course, “the primary season” extends all the way until late June. I had heard we might see a Phase Two plan in the spring. So we’ll see.

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