海角大神

The editorial page of the WSJ is at it again, torturing numbers until they confess to crimes they did not commit.聽 In this case, they鈥檙e claiming that Mitt Romney鈥檚 tax rate is a lot higher than the 15% he himself has acknowledged, and that his tax records confirm.聽 It鈥檚 a claim that requires considerable sleight of hand, as I鈥檒l show.聽 But more importantly, when you actually start to look at the tax code that applies to rich folks like Gov Romney, with all their income from investments as opposed to earnings, you get a sense of just how tilted tax policy is in their favor.

The Journal鈥檚 main point is this:

One reason investment income is taxed at a lower rate than wage and salary income is because it is a double tax鈥攑rofits are taxed once under the statutory 35% corporate tax rate and then again when they are paid out to individuals as dividends.

But this is almost certainly not the case with income from private equity firms like Bain Capital, because they are聽invariably set up as 鈥減ass throughs,鈥� meaning that profits face only the individual rates of the owners, not the corporate rate.

What about the corporations in which the PE funds invest?聽 Don鈥檛 they pay the corporate rate and wouldn鈥檛 that be capitalized into their profits (which would be lower due to the corp tax)?聽 But that鈥檚 not how the PE guys roll.聽 They profit from buying and selling undervalued stock in the company, or for that matter, selling the undervalued company itself.聽 The corp rate doesn鈥檛 come into play in either scenario (Dan Shaviro makes these points ).

And to the extent that these companies are themselves pass-throughs, the corporate rate again doesn鈥檛 apply.聽 Based on Romney鈥檚 tax returns, it鈥檚 impossible to tell whether the capital gains he realized through these companies reflect corporate taxes at all (interestingly, Romney鈥檚 trustee actually made this point to the WSJ, which chose to ignore it).

Finally, remember this: PEs are masters of debt financing, and debt financing carries an effective tax rate of -6% because business interest can be deducted from your tax bill.聽聽For the highly leveraged PE crowd, debt financing is a tax shelter for other liabilities they face, including any corporate income that might slip through the cracks鈥�if I were the WSJ here, I鈥檇 crow that Romney鈥檚 tax rate is actually 9% (15-6)!

Let me be clear: I鈥檓 not saying Gov Romney did anything wrong here鈥攖hough I am saying that without dealing with all of the issues above, the WSJ鈥檚 claims are clearly unfounded.聽 What鈥檚 wrong is the tax system itself鈥攂y favoring investment income, the excessive use of pass-throughs, and subsidizing debt financing, it鈥檚 even more distortionary and unfair than the WSJ editorial page.