Not for the first time during this US presidential campaign, private equity was once again kicked around like a political football at the Democratic and Republican National Conventions this summer.
President Barack Obama and Bain Capital founder Mitt Romney weren’t the official nominees for the White House until they accepted their parties’ respective nominations at the conventions, which took place during over a two-week period in late August (RNC) and early September (DNC).
With all the pageantry of a dog show, only slightly less subtle, party conventions allow partisan supporters to stroke their candidates’ egos slowly and steadily for several days until the splendiferous red, white and blue final climax – which showcases the candidates’ shared ability to deliver fiery, platitude-heavy speeches largely devoid of specifics.
Conventions are, in every sense, about political ‘parties’. So they’re rarely an occasion for in-depth, substantial debates on matters of public policy.
As such, Republican Congressman Darrell Issa’s decision to diverge from his party’s stance on the tax treatment of carried interest must have come as a bit of a shock to Romney’s private equity backers, many of whom have vocally criticised the current President’s perceived anti-business agenda.
While participating in an economics panel at the RNC hosted by Politico, a US media group, Issa was asked to give an example of what he considers to be a tax loophole. Instead of skirting the question, he went with a more direct approach: “The one that I consider a loophole is carried interest. I’m very pro-business, but if you’re going to get capital gains treatment, I want you to have really engaged capital; I want you to have made an investment, and for that investment to be truly long term.”
Now, obviously, this stance struck many observers as being somewhat controversial. The GOP prides itself for being more business friendly than their opponents – one reason why many private equity executives have donated heavily to Republican-leaning political action committees recently – and Issa’s views explicitly contradict those of many in his party.
The ‘awkwardness’ (in Politico’s words) of Issa’s statement was particularly notable when you consider that Romney himself has benefitted from carry’s preferred 15 percent tax treatment (compared to income’s maximum rate of 35 percent) for years through his stakes in Bain funds.
However, instead of rowing back from the statement, later that week Issa not only repeated it, in an interview with Bloomberg, but suggested the would-be President might agree with him.
“Carried interest could easily be no longer considered to be a gain at 15 percent. Easy way to look at it: 1986. Ronald Reagan is President. Capital gains, carried interest, ordinary income were all 28 percent. We can in fact have flatter, fairer taxes. And this is what both Governor Romney and Congressman [Paul] Ryan have been championing,” he said.
If what Issa is saying is true – that Romney may close the carried tax ‘loophole’ – then that would run counter to the way his party has voted throughout the Obama administration. Despite repeated efforts on the part of Democratic congressmen (and the President himself), Congress has yet to pass any tax reforms that include changes to carried interest’s tax treatment. More curiously, both Issa and GOP Vice Presidential nominee Ryan voted against one such effort during the previous legislative session (2009–2010).
Issa’s office did not respond to requests for comment. Ryan’s congressional staff was not taking phone calls at press time.
Romney has yet to state his campaign’s exact position on carried interest’s tax treatment, though aides to the campaign have reportedly hinted that the issue may be on the table if he were to win in November. When asked by PEI whether he would be taking a position on the issue, Romney’s press office responded by copy-and-pasting his response to a similar question from Fortune:
“You know, 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. I would look at each type of income, and I’m sure the IRS would do the same, to determine is this really a capital gain or is it ordinary income?”
While that answer establishes that he thinks capital gains and ordinary income should be treated differently, it doesn’t clarify how he thinks carried interest should be categorised. Romney’s unwillingness to take a stance on this issue is well-documented, but to do so after being called out by a prominent member of his own party is a little odd, to say the least. The Romney campaign did not respond to a follow-up question on the subject.
Compared to Romney, President Obama has been very clear (though less industry-friendly) on his stance in the carried interest debate: he has talked about changing carry’s tax treatment to that of regular income throughout his first term.
Either way, don’t expect a resolution on the issue anytime soon. Private Equity Growth Capital Council chief Steve Judge has said repeatedly that the debate surround carry’s tax treatment will continue until Democrats or Republicans collaborate on comprehensive tax reform – possibly in 2013 or 2014.
Until then, it’s going to be a long season of political football for carry.