Saturday, August 18, 2012

Carried Interest Loophole

In Matthew 22:21,  Jesus said, "Render to Caesar the things that are Caesar's; and to God the things that are God's." 

In an interview last week, Mitt Romney stated, “What I’ve said in the past is that if something is a capital gain it should be treated as a capital gain. If something is ordinary income it should be treated as ordinary income." 

But where is the bright line? How can people tell if they fall into the first category or the second? What to do with the grey area? Are you a red fish or blue fish? A One fish or a two fish?

For the first question, I will leave that to the philosophers' and religious academics. Experts who know way more than I do in these regards. 

For the second question, now that's a real policy question! That's something I can answer! Or, more like it, intelligently stumble through a non-answer because it is not so clear for a certain group of people - and for them, it is known as the carried interest loophole.

Most of us have jobs. We get paychecks and pay payroll taxes on said paychecks. After that, we pay income taxes on the remainder. Ordinary income as Mitt Romney might refer to as.

A few of us have plenty of money sitting around already that is doing the work for us. These people pay short-term capital gains taxes on short-term investments, which is at the same rate as the income taxes, and long term capital gains on long-term investments, which is about half the rate of income taxes. Note the lack of payroll taxes either way.

Then there is they very, very small group of people who are in the first group of people who work for the second group of people at some of these huge international investment banks. Wall Street. Or they are CEOs and top executives who are paid with stock options. They get paychecks like first group, but because it is based on capital gains, so they pay taxes like the second group. That is to say, a whole lot less than most working people while earning a whole lot more.

That, in effect, is the carried interest loophole. Do, what do we do about it? Democrats (in general) want to close it and Republicans (in general) say that it provides incentive for good investment. I believe a higher paycheck is enough of an investment without the additional tax loophole, but then again - I don't work on Wall Street. 

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