Romney pays 15% tax rate

[RandFan]

If you make no sales you are in the same financial position you started off in. If you invest $100,000 in a new business, and it fails, bye-bye to your $100,000. Maybe you get a few hundred back in the liquidation sale.

Let's see, I could take a job with a salary where I would be guaranteed an income or I could take a sales job. If I take the sales job I risk the money I would have gotten from the salaried job. In what world is one's time worthless?

 

[WildCat]

I've no idea what that means. Assuming for the moment that you are talking about an ideal rate, based on what theory? And the other questions?

That answers all your questions.

The higher the tax rate on capital gains, the fewer people will take the risk of capital investment. I have no idea why this is so hard to understand. Every investment goes through a risk vs. reward analysis, and the results will differ with every person according to how risk-averse they are.

 

[WildCat]

Let's see, I could take a job with a salary where I would be guaranteed an income or I could take a sales job. If I take the sales job I risk the money I would have gotten from the salaried job. In what world is one's time worthless?

You're not putting your money at risk, only future earnings. That isn't capital.

 

[RandFan]

That answers all your questions.

No, not even close.

The higher the tax rate on capital gains, the fewer people will take the risk of capital investment. I have no idea why this is so hard to understand.

I have granted the premise that lower rates tend to spur increased investment. A.) You have not shown that 14% is always better in the aggregate than 15%. B.) Even if the lower rate would guarantee increased investment you have not shown that it would guarantee improvement to the economy, increased jobs or higher net taxes.

IOW: Assuming your premise, investment itself is no panacea for anything nor does it necessarily counter the lost tax revenue.

And I don't know why that is so hard to understand.

 

[RandFan]

You're not putting your money at risk, only future earnings. That isn't capital.

At the moment I write lost revenue off it is capitals. Regardless, it is a risk.

But okay, let's take assume this premise for a moment. Isn't carried interest just future earnings?

 

[Unabogie]

A couple new wrinkles here. One, Romney apparently gave John McCain 23 years of tax returns in 2008 as part of the VP vetting process. So Romney was far more open with McCain than he's being with the rest of the country.

Second, Romney signed a special deal with Bain that exempted him from all risk.

http://www.nytimes.com/2007/06/04/us/politics/04bain.html

So if he was supposed to be getting a tax break to compensate for risk, then the law failed, because Romney was shielded from that risk.

Anyone else want to take a stab at why Romney should only pay 13.9% on his money while the rest of us pay so much more?

 

[RandFan]

Anyone else want to take a stab at why Romney should only pay 13.9% on his money while the rest of us pay so much more?

Is there any evidence that these policies actually benefit America? If Germany can raise it's capital gains tax from 0% to 25% why can't we raise ours some? And what benefit do we get from taxing capital that isn't at risk?

 

[Unabogie]

Is there any evidence that these policies actually benefit America? If Germany can raise it's capital gains tax from 0% to 25% why can't we raise ours some? And what benefit do we get from taxing capital that isn't at risk?

The thing about Romney is that his money was NEVER at risk. Bain took all the risk. So in light of that, even if you want to say that tax breaks for investments should be lower to spur investment (which has never been proven), then how does this apply to Mittens?

 

[RandFan]

The thing about Romney is that his money was NEVER at risk. Bain took all the risk. So in light of that, even if you want to say that tax breaks for investments should be lower to spur investment (which has never been proven), then how does this apply to Mittens?

Understood. And let's note that for hedge fund managers their "future earnings" (carried interest), as Wildcat tells us, are not at risk either.

 

[jimtron]

One point that might not have been made yet; an investor could make some or all of her capital gains from foreign securities, not to mention foreign tax dodges (like Romney's Cayman Islands money and Swiss bank account). Why does that investor deserve to pay a lower tax rate than a NYC cop or firefighter, who (to borrow one of Randfan's arguments), takes an incredibly huge risk to defend fellow citizens?

 

[Francesca R]

It would help if you would clearly state your position.

See post 121

 

[Francesca R]

I know of no fund managers who don't spend money going to college, which one could call a financial risk since they may not make enough money in their lifetime to overcome the cost. But I wouldn't include that as a financial risk directly associated with carried interest.

It isn't. It isn't putting money into the same legal entity that the potential profit stream comes from. A degree is a free-standing, transferable asset. Investing money in one's human capital is not the same as investing money in a business (limited partnership, LLC, whatever) which can generate carried interest profits.

Yes, I meant financial risk of investment capital. And I meant financial risk of investment capital directly associated with the carried interest income in question, not financial risk associated with becoming a fund manager or building an investment firm or setting up a fund.

Building an investment firm and setting up a fund are directly associated with the carried interest that may come from running it. Those things cost money that you have to put in, and if the firm/fund is not successful you can lose all of it. You seem to agree, at least, that there are costs and risks. Where you go wrong is to claim that these are divorced from the revenue stream they are committed to create.

Becoming a fund manager isn't directly associated as you can be a fund manager in various ways. A bank or an investment firm can hire you as a fund manager as an employee but in that case you earn salary, plus perhaps a bonus which is sometimes described as a profit share, but unless you hold equity capital in the firm that's all income and attracts income tax. It is not carried interest in that case. It is possible that the owners of the firm hiring you can give you equity without you having to pay for it, and then you can accrue carried interest from that, but that's giving you money which is then at risk, no different to some benefactor giving you $1m to start up a firm.

I thought it was fairly clear in the context of the argument that I was responding to, but perhaps I wasn't clear enough.

I don't believe you understand the business ownership legalities and risks that go hand-in-hand with the earning of carried interest. There also seems to be some illusion you have that in success cases where the investment risk has paid off, it somehow means that the enterprise involves no risk. That is no more sensible than saying that a retired person collecting an annuity stream from a matured DC pension is getting money for nothing that doesn't cost her anything and involves no personal risk, simply because the investment commitment and the risk had been borne in the past.

 

[Francesca R]

So, I assume by your response then that you agree that carried interest for fund managers does not constitute risk

I said carried interest involves personal risk (financial risk, money that has to be committed up front that may not come back) to get it. You may know of a situation where this did not happen first; I don't know of any. I don't know what your assumption there means, but I don't think it's something I agree with.

even though like commissioned sales people they risk not getting paid for their labor.

Does a salesperson on a commission formula have to put capital into a business? If not, there's the difference.

And how is one's time not equal to money?

Never said it wasn't.

 

[Francesca R]

See, this is the problem, just because there is a "risk" doesn't mean that it's the same as investing one's money.

Except that becoming a partner in a business that can earn profits qualifying as carried interest almost invariably does involve investing one's money.

 

[Bri]

Building an investment firm and setting up a fund are directly associated with the carried interest that may come from running it. Those things cost money that you have to put in, and if the firm/fund is not successful you can lose all of it.

Investing money in one's business is a separate activity from earning carried interest. Everyone who builds a business invests time and money into their business to build it. Usually those who build companies seek investors, so their own capital isn't necessarily at risk. Should all activity that is the result of building a business be taxed at 15%?

You seem to agree, at least, that there are costs and risks. Where you go wrong is to claim that these are divorced from the revenue stream they are committed to create.

No, I'm not claiming that the costs and risks of building a business is "divorced" from the revenue stream created. I'm saying that the revenue stream called "carried interest" is a fee for managing investments of other people's money, and that those other people incur the risk associated with the investments being managed.

I don't believe you understand the business ownership legalities and risks that go hand-in-hand with the earning of carried interest.

There are risks associated with building and owning any business, and most activities that are the result of businesses aren't taxed at 15%. Obviously, I wasn't including those risks in the statement you are parsing since they aren't risks unique to businesses that generate carried interest.

-Bri

 

[Francesca R]

Investing money in one's business is a separate activity from earning carried interest. Everyone who builds a business invests time and money into their business to build it. Usually those who build companies seek investors, so their own capital isn't necessarily at risk.

And the carried interest return accrues to the equity holder. If that's an outside investor then the outside investor has the carried interest claim. The two are inextricably tied together.

And yes--everyone who builds a business does typically invest [time and] money in it. So why did you state that carried interest involved no personal risk?

Should all activity that is the result of building a business be taxed at 15%?

I am not arguing about the tax rate. I am, once again, refuting the point you made (which you appear to have conceded) that carried interest involves no personal risk.

No, I'm not claiming that the costs and risks of building a business is "divorced" from the revenue stream created.

Then I don't think you really meant what you said.

I'm saying that the revenue stream called "carried interest" is a fee for managing investments of other people's money, and that those other people incur the risk associated with the investments being managed.

Yes, and the beneficiary of the carried interest bears/bore the costs/risks of owning the partnership. If they did not, then fees would not be called carried interest. Plus, carried interest is not something that applies only to hedge funds. You can hardly suggest that a partner in a property development incurs/incurred no risk. I don't know why you think the hedge fund example is qualitatively different.

There are risks associated with building and owning any business

Glad you agree. And this contradicts the notion that being the beneficiary of carried interest involves no personal risk.

I wasn't including those risks in the statement to which you are parsing since they aren't risks unique to businesses that generate carried interest.

. . . and again, "[not] risks unique to businesses that generate carried interest" indicates that businesses that generate carried interest do have risks, according to your own words.

 

[BenBurch]

...examples of just the opposite.

Show me. Specifics, please. And not just examples, I want to see a population study.

 

[WildCat]

No, not even close.

I have granted the premise that lower rates tend to spur increased investment. A.) You have not shown that 14% is always better in the aggregate than 15%. B.) Even if the lower rate would guarantee increased investment you have not shown that it would guarantee improvement to the economy, increased jobs or higher net taxes.

IOW: Assuming your premise, investment itself is no panacea for anything nor does it necessarily counter the lost tax revenue.

And I don't know why that is so hard to understand.

My claim is that lower rates will spur more investment, all other things being equal. You have done nothing to dispprove that premise.

And look at the cute panacea strawman!

At the moment I write lost revenue off it is capitals. Regardless, it is a risk.

So is walking across the street. But it's not capital.

But okay, let's take assume this premise for a moment. Isn't carried interest just future earnings?

No, it represents a past capital expense.

 

[WildCat]

Is there any evidence that these policies actually benefit America? If Germany can raise it's capital gains tax from 0% to 25% why can't we raise ours some? And what benefit do we get from taxing capital that isn't at risk?

That's less than half of Germany's top tax rate. If Warren Buffet lived in Germany his tax rate would still be much less than his secretary's tax rate. Oh, the humanity! And I can only assume you're still confused what capital investment is.

 

[Bri]

And the carried interest return accrues to the equity holder. If that's an outside investor then the outside investor has the carried interest claim. The two are inextricably tied together.

I don't believe that's the case, at least not in this country. An outside investor does not receive carried interest. Profits made by an outside investor would be regular capital gains.

And yes--everyone who builds a business does typically invest [time and] money in it. So why did you state that carried interest involved no personal risk?

I think I've made it quite clear that I was outlining a difference between carried interest and regular capital gains in a succinct way. I wasn't expecting someone to parse my words and state something that is completely obvious and totally irrelevant to the argument to which I was responding. Building any business involves some risk, yet the results of that risk are seldom taxed at a lower tax rate because of it. Carried interest appears to be an exception, which was entirely my point.

I am not arguing about the tax rate. I am, once again, refuting the point you made (which you appear to have conceded) that carried interest involves no personal risk.

Yes, I concede that if you parse my words, I didn't add enough qualifiers to exclude the type of risk you're apparently talking about, nor any number of other types of risks (for example, the possibility of a fund manager getting hit by a bus on her way to work). But then, it was a pretty simple point I was making and didn't really require three pages of explanation to exclude all the risks that are common to any business since that had nothing at all to do with the argument about which I was commenting.

Yes, and the beneficiary of the carried interest bears/bore the costs/risks of owning the partnership.

But not the risk of the investment that directly generated the fees known as "carried interest."

. . . and again, "[not] risks unique to businesses that generate carried interest" indicates that businesses that generate carried interest do have risks, according to your own words.

Congratulations. Yes, I admitted three pages ago that there are risks, including getting hit by a bus on the way to work. None are directly related to the carried interest since they apply to nearly any business including those that don't generate carried interest.

I thought you might have a point that was relevant to the discussion. If you're done parsing words now, we can move beyond this apparent derail.

-Bri