Why Mitt's Tax Returns Matter

From Tara:

 As we now know, Mitt Romney's defeat in South Carolina has prompted him to agree to release  his 2010 tax return and an estimate of his 2011 taxes.  We've also heard that he pays taxes an the infuriatingly-low rate of 15 percent, because his earnings are taxed as capital gains, rather than income.  In addition, the release of these returns will pull back the curtain on the kind of "work" a guy does to earn the income he's had.  James Surowiecki has a short piece in the New Yorker  that explains why private-equity firms like Romney's are bad news all around (this is a long excerpt, but you should click through for the rest):

The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets, deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits.

...

Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” This allowed them to recoup their initial investment while keeping the same ownership stake. Before 2000, big special dividends were not that common. But between 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

As a result, private-equity firms are increasingly able to profit even if the companies they run go under—an outcome made much likelier by all the extra borrowing—and many companies have been getting picked clean. In 2004, for instance, Wasserstein & Company bought the thriving mail-order fruit retailer Harry and David. The following year, Wasserstein and other investors took out more than a hundred million in dividends, paid for with borrowed money—covering their original investment plus a twenty-three per cent profit—and charged Harry and David millions in “management fees.” Last year, Harry and David defaulted on its debt and dumped its pension obligations. In other words, Wasserstein failed to improve the company’s performance, failed to meet its obligations to creditors, screwed its workers, and still made a profit. That’s not exactly how capitalism is supposed to work.

The people who ran Harry and David into the ground have a defense: economic conditions changed in unforeseeable ways. But that’s precisely why loading firms with debt in order to reap short-term benefits is bad. It leaves companies unable to weather tough times, and allows private-equity firms to make money even if things go wrong.

As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab; and the money that the dealmakers earn is taxed at a much lower rate than normal income would be, thanks to the so-called “carried interest” loophole. The money that Mitt Romney made when he was at Bain Capital was compensation for his (apparently excellent) work, but, instead of being taxed as income, it was taxed as a capital gain. It’s a very cozy arrangement.

Now I know that some people will argue (see the long comment thread over at Althouse  for a prime example) that the lower rate on capital gains is an incentive to investment.  Maybe that's true, especially given the above.  When you're pretty much guaranteed a payout, even if the company in which you're investing fails and dumps its obligations on the Federal government, what's not to like?  And the suggestion that those capital gains have already been taxed at the corporate tax rate of 35 percent is just nonsense.  There's no getting around the Gordon Gekko comparisons , because they are accurate.