Willard’s carried interest

Willard Mitt Romney pays a lower tax rate on the millions of dollars he continues to earn from his asset-stripping activities at Bain Capital than ordinary folks pay on their income. Sounds like an issue to me.

This post is a double plagiarism from Steve Benen. (I only steal from the best.)

The first theft of IP is in the post’s title. In his post about Romney’s weaknesses and the failure of his opponents to exploit them –  cited by Keith below - Steve mentioned that Mittens’s first name is actually Willard. Not sure I knew that.

This reminds me of George H.W. Bush’s effortless destruction of Gov. Pete du Pont of Delaware, when he started his response to a du Pont attack with “Let me help you, Pierre.” Like “Pierre,” “Willard” sounds not only peculiar but patrician. Why not use it to needle him?

I’d also like to steal Steve’s short recitation of the story behind Willard’s unreleased tax returns: they will show that – due to the utterly unjustifiable treatment of “carried interest” as capital gains rather than ordinary income – he’s paying a lower tax rate on the millions of dollars he continues to earn from his earlier asset-stripping activity at Bain Capital. Here’s the Benen summary.

1. Mitt Romney is worth $250 million.

2. He got rich by laying off American workers.

3. He pays a lower tax rate than you and the rest of the middle class.

4. He wants to be president so he can keep it this way.

I hope the Democrats figure out a way to force a vote on carried interest sometime before the elections. Of course, some monehy-center Democrats will no doubt fink out on us if such a vote happens, but it’s still a good issue to raise.




Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

41 thoughts on “Willard’s carried interest”

  1. Why not use his name to needle him? Because he didn’t choose “Willard”; in fact, he rejected it in favor of his middle name. And because it is juvenile to make fun of someone’s name, and because only someone like George H.W. Bush, who would appoint Clarence Thomas to the Supreme Court in order to stick it to affirmative action supporters, would sink so low. Surely there are enough valid reasons to criticize Romney.

  2. it is juvenile to make fun of someone’s name

    Hear, hear.

  3. Making fun of his name might work for his Republican rivals in the primary, but I don’t think supporters of a candidate whose middle name is “Hussein” will be able to use this in the general.

  4. I just hope our side says “Willard” as often as the other side says “Hussein.”

    As to the claim that mocking someone’s name is “juvenile,” we’re not going for style points here. The object of the exercise is to actually win the damned election.

    1. Mark: The object of the exercise is to actually win the damned election.

      At what cost to our democracy? Personally, I’m not so willing to throw rational discourse under the bus.

      1. Personally, I’m not so willing to throw rational discourse under the bus.

        Framing the political landscape is one thing. Discussing the accuracy of the framing is the next step. Not the same.

        1. I am fully aware that the current situation is pretty bad; it is part of the reason why I consider the Republican party to be currently unelectable. In the end, however, I don’t see the political equivalent of Mutual Assured Destruction to be something that is a good thing in the long term.

          That does not mean that you should engage in unilateral disarmament, but you want to look for political strategies that deescalate and avoid those that needlessly escalate. Playing silly games with the names of politicians is a needless escalation.

  5. As silly as the first part of your post is – I can’t even begin to imagine the hissyfit you’d throw if someone suggested republicans begin making fun of Obama’s name – the disdain you show for markets may be even more ridiculous. Layoffs are an unfortunate part of business, but to claim that Romney got rich from layoffs is laughable. He got rich from accurately valuing assets, a skill that benefits the economy as a whole. I would think someone with your training in economics would be aware of this.

    An equally silly thing to say about Dems like Obama and Liz Warren: they got rich by fleecing law students who took out ridiculous student loans to pay for a legal education that (for many) won’t pay off.

    1. If he so accurately valued the assets, then why did so many of the companies end up in bankruptcy? If this were really benefiting the economy as a whole, who is it that Bain managed to turn a profit buying companies that went from solvent to bankrupt on its watch?

      What Bain, and Romney, did wasn’t so much to better price assets than anyone else. Rather, it was taking advantage the tax privilege of debt financing over equity as well as superior inside information that enabled them to overleverage companies while extracting fees and repaying themselves for their purchase price, leaving the debt riddled carcass for others.

  6. “Willard” is associated in the minds of most Americans with Willard Scott, the 77-year-old weatherman who spent 30 very popular years on the Today show and still appears on-air to give birthday greetings to centenarians. It’s not a particularly funny name and I doubt there’s much mileage to get out of it.

    1. Maybe that’s the case for ELDERLY Americans. I can assure you that for most Americans UNDER the age of 60, “Willard” is the name of a film about a RAT. And that’s what MOST people, and, more to the point, most VOTERS, in this country will think of when faced with the possibility of voting for one Willard “Mitt” Romney. (1) A guy who shares a name with a film about a rat; and (2) who uses his middle name (which is just as weird) almost exclusively; and (3) belongs to a cult-like group of people with weird names.

  7. “He got rich from accurately valuing assets”

    “Bain Capital’s acquisition of Ampad exemplified a deal where it profited handsomely from early payments and management fees, even though the subject company itself ended up going into bankruptcy… Dade Behring was another case where Bain Capital received an eightfold return on its investment, but the company itself was saddled with debt and laid off over a thousand employees before Bain Capital exited (the company subsequently went into bankruptcy, with more layoffs, before recovering and prospering).”


  8. “2. He got rich by laying off American workers.”

    This statement is unsupported, which could be because you are uninformed and could be because you’re informed and just don’t care to be accurate.

    The various Bain Capital partnerships that Mitt Romney was a General Partner in have bought and sold dozens of businesses since the mid 1980s. As is the case with any private equity firm, in a subset of cases, the businesses laid off workers net of jobs created during the time that they were owned by Bain Capital. And of course in another subset of cases, the businesses grew rapidly during the time that they were owned by Bain Capital and hired many new workers net of any layoffs. What a muddle! If only there were rigorous academic research on the net job changes associated with private equity buyouts. Oh wait, there is!


    From which we learn…

    “Relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five yea”rs. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1 percent of initial employment. In contrast, the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years.”


    “The average cumulative employment difference in the two years before the transaction is about 4% in favour of controls. In short, employment growth at controls outstrips employment growth at targets before and after the private equity transaction.”

    In other words, employment at the kinds of businesses bought by private equity firms tends to be in decline relative to controls prior to being bought, and during the time that these businesses are owned by private equity firms their employment profile improves relative to the pre-buyout trend. Not such a convenient story anymore now is it?

    But of course, that’s the aggregate average, not a study of the impact of Bain Capital specifically. But anyone who follows the private equity market will tell you that Bain Capital’s investments has historically tilted much more strongly to growth plays than cost take-out plays. Certainly compared to other mega firms like Clayton Dubilier & Rice or KKR, Bain Capital has been much more interested in driving top line growth (which of course leads to net job creation) over time). Now, sometimes Bain Capital does buy companies for which the “deal thesis” is that the business is structurally high-cost and that it can be made more valuable by downsizing the workforce, but such transactions are a minority of their total deal flow. It should be pointed out that in cases where Bain Capital (or another firm) can buy a company, fire a large % of the workforce, and not adversely impact the growth trajectory of the business, then that business would almost certainly be headed for severe financial distress in the absence of the private equity buyout. The argument that private equity firms strip-mine the businesses they buy for short term gain is simply stupid. Most private equity transactions have a life of 5-7 years. Its in the public equity markets that you’ll find destructive short-term cost cutting designed to meet this quarter’s earnings target.

    But even if Mitt Romney has indeed gotten rich “by laying off American workers” then he has a lot of company – notably on the faculties of most of the nation’s elite private universities and those public universities that have endowment pools (cough, UCLA, cough). Because of course the vast majority of the capital invested in US Private Equity partnerships (including Bain Capital – look it up) is owned by institutional investors, mostly university endowments and massive public pension funds. The Private Equity boom that has washed over the US economy in the last 25 years has greatly enriched universities, including those that pay the salaries of several of the co-bloggers here.

    The investment activity engaged in by Bain Capital is either morally bad or morally neutral/good. If its the former, then the only moral course of action for the Harvards, Yales, Calpers, etc. of the world is to give the money that they’ve made from investing in Bain Capital and other private equity firms over the last 20-30 years away. It may hurt a bit (and by “a bit” I mean to the tune of tens of billions of dollars – you don’t generate 20% annualized returns by investing in Ma Bell after all) but if what Mitt Romney has been doing is morally suspect then surely the morally righteous should be willing to wash their hands of this dirty affair (and of course downsize the programs whose collective growth has been fueled by the growth in their endowments).

    If its the latter, then attacking Mitt Romney on this basis is nothing but hackery.

    1. You aren’t going to find a lot of defenders of university endowment operations around here, I’d bet. The same is even more likely to be true of the short term emphasis of equity markets.

      Also, do you have anything beyond handwaving to back up the claim that Romney’s operations are dramatically different than the rest of the industry?

  9. If private equity is economically viable activity, why do its operators need a special tax break?

  10. “If private equity is economically viable activity, why do its operators need a special tax break?”

    What an odd statement. Clearly private equity would still be economically viable in the absence of the tax treatment of carried interest. The fact that carried interest is taxes at capital gains rates rather than at normal income tax rates certainly makes it more lucrative to be a general partner in a private equity firm, but its not as if the business wouldn’t exist in the absence of such tax treatment.

    If you want to tax carried interest at the rate of normal income – fine. Make your case in the arena of democracy. That’s a normative judgment, as are all judgments about what we should tax. The fact that such arguments haven’t carried a lot of sway in the past several decades should tell you something about the political wisdom of trying to hang an election on the minutiae of tax law. But hey – its a free country.

    Of course, there is no viable, legal way to only treat private equity partnership interest as normal income. Any change to the relevant tax law would impact lots of other business partnerships, some of which benefits folks who have a net worth substantially less than $250M. But eggs must be broken to make omlettes after all.

    P.S. IMHO the correct way to treat carried interest for tax purposes would be a hybrid of the current system and the system proposed by those who want to tax carried interest as normal income.

    1. sd,

      Kindly provide a distinction between income from “carried interest” and income from “sales commissions,” to take just one analogy.

      1. A sales commission is a pre-tax expense. It is paid out to the employee (salesperson) before corporate taxes are levied on the business. Capital gains represent the increase in value of a business to its owners, which by definition represents the value after corporate taxes are paid.

        Carried interest inherently has some of the properties of compensation, and some of the properties of equity.

        I for one agree with those who say that carried interest is not, strictly speaking, akin to capital gains and thus should be taxed at a rate higher than the capital gains tax rate. But its also not, strictly speaking, akin to ordinary income, and thus should be taxed at a rate lower than the ordinary income tax rate.

        1. sd,

          Yes, I understand the difference you describe. But it’s irrelevant. When a real estate agent sells a commercial property the sellers often receive a capital gain, but the agent’s commission is still just ordinary income to the agent. The argument for the loophole is that the carried interest compensation is “at risk.” But it’s not at risk any differently than a sales commission. You earn it if you perform, and not otherwise.

          There’s no money actually at risk. A private equity firm buys a company with its investors’ money, and then essentially takes 20% of it for itself, without putting up any of its own cash. Then, when the company is sold at a profit, the PE firm gets its 20% of the payout. So if the original purchase price is $1 million, the PE firm effectively gets $200,000 from its investors, but pays no tax. Then when the company is sold for, say, $2 million, the PE firm picks up $400K for its management services, which is mysteriously categorized as a capital gain rather than payment for services rendered.

          Now, I’m happy to let it be a capital gain if the PE firm had originally paid tax on $300K or so. If it had, it would be in the same position as its investors. It earns $300K -ordinary income – for putting together the deal, pays about a third in taxes, and invests the remaining $200K, really putting it at risk, and entitling it to capital gains treatment of its profits when the company is sold.

          But that’s not what happens. Instead the PE firm puts no money at risk and gets a 20% cut of the final deal. Sounds a lot like a sales commission to me.

          1. I actually suspect that you and I are not that far apart in how we would like to see the tax treatment of carried interest handled. As I said – I favor a system that would be something of a hybrid between the current system, which treats carried interest as a capital gain, and the system proposed by many policy liberals, that would treat carried interest as ordinary income.

            And the reason I’d favor a hybrid approach is implicit in your argument – namely that the PE manager receives compensation that sure seems like ordinary income, but the terms of the partnership require them to invest that compensation in the partnership itself and put it at risk based on the investments that the partnership makes, which sure seems like a capital gain.

            Let’s illustrate with some math. The Limited Partners (investors) put up $100. The General Partner (fund manager) invests that $100 in a company, which it sells 5 years later for $300. So there’s a $200 profit on the investment, and the terms of the PE partnership agreement (assuming its normal terms) state that the GP gets 20% of the $200 profit, or $40.

            But legally the GP doesn’t really get 20% of the profit, he gets 13.3% of the partnership ($40 / $300). The “20%” is simply a calculation term – its a legally agreed to number that is used in calculating how much of the total partnership equity the GP is entitled to after the partnership is liquidated.

            So the GP has been “paid” 13.3% of the original partnership equity, and has, along with the LPs, risked that equity in an investment that has generated a capital gain. In this example then I would treat $13.30 of the $40 that the GP made on the deal as ordinary income, and the rest ($26.70) as a capital gain. Under this accounting, the GP pays capital gains taxes on an investment whose rate of return is exactly equal to the rate of return earned by the LPs. He is a true equity partner to the investors. He pays ordinary income taxes on a portion of what he earns, which seems appropriate, and capital gains taxes on a portion, which also seems appropriate. After all, he was “compensated” for making an investment decision in year 1, but doesn’t get paid until year 5 and the amount he is paid depends on returns in investment markets that are very much at risk.

            Now let’s assume that our hypothetical GP is smarter than the average bear. He invests the $100 in a company that is sold at year 5 for $500. Now there is an investment profit of $400, and his 20% stake in that is worth $80. But again, this really means that he now owns 16% of the partnership equity ($80 / $500). That means he should be taxed on $16 of ordinary income, and $64 of capital gain. His ordinary income, and thus his income tax bill, is higher than it was in the first scenario. But his capital gain, and thus his capital gains tax bill, is much higher. And this is how it should be – the better the GP performs, the more he has a legitimate claim to be an equal partner with the LPs who front the initial capital.

            Note that the tax bill cannot be calculated under this approach until the partnership liquidates its investments. But there are lots of areas where the tax law has to make allowances for activities that have a multi-year time horizon. To deal with this, you’d simply tack on a deferred interest charge at the normal IRS rates for 5 years for the $13.30 in ordinary income ($16.00 in the second scenario).

          2. sd,

            Close, but not the same. The General Partner – the PE firm – should be taxed at the beginning of the deal. That’s when it got compensation for putting the deal together. Its breakdown of ordinary income vs capital gain should not be determined by how the deal comes out. Having money at risk is what justifies capital gains treatment.

            Take an ordinary investor in a PE fund. The investor earns, taking your numbers, $150 elsewhere and has $100 left after paying taxes. That $100 is invested in the PE fund and used to buy a company, of which the PE firm takes 20%. Some time later the comapny is sold at a profit, and the investor gets a capital gain on the profit. OK. There was $20 at risk.

            Now look at the PE firm. At the start it takes 20% of the acquired company. That’s clearly worth $20. So the PE firm has received $20 in ordinary income and ought to pay tax on that. If there’s a profit at the end then the PE firm gets a capiatl gain.

            The point here is that the ordinary income comes to the PE firm at th ebeginning, not the end. The deal might go broke? Too bad. Then you’ve lost after-tax money, just like the investor. Again, the trouble with your proposal is that it breaks the PE firm’s income into ordinary income and capital gains based on the deal’s result, and not on the nature of the income received.

          3. “Now look at the PE firm. At the start it takes 20% of the acquired company. That’s clearly worth $20. So the PE firm has received $20 in ordinary income and ought to pay tax on that. If there’s a profit at the end then the PE firm gets a capiatl gain.”

            That’s not how PE works at all. The GP doesn;t get 20% of the value of the investment fund as compensation at the time of the start of the partnership. The GP receives equity in the partnership equal to 20% of the investment profit realized over the life of the partnership.

            If the LPs provide $100 in capital, the GP invests the $100 in a business, that is later sold for $100, the the GP receives zero carried interest. Its only if the investment generates a positive return that the GP is paid. And the amount that he or she is paid cannot be determined until the partnership has run its course. There is no transfer of wealth from the LPs to the GP at all at the beginning of a partnership’s life. None.

    2. The fact that carried interest is taxes at capital gains rates rather than at normal income tax rates certainly makes it more lucrative to be a general partner in a private equity firm, but its not as if the business wouldn’t exist in the absence of such tax treatment.

      Wait, wait, wait. You mean to say that lowering someone’s tax rate doesn’t make economic activity (and, presumably, job creation) viable? It would happen even if the activity were taxed at a higher rate? Well, then, let’s put marginal tax rates back up.

      Of course, there is no viable, legal way to only treat private equity partnership interest as normal income.

      I don’t know of anyone who has argued that the carried interest rule should be eliminated only for private equity.

      Any change to the relevant tax law would impact lots of other business partnerships

      Not quite. Most business partnerships would be unaffected. The only ones that would be affected are the managers (not investors) of *investment* partnerships, primarily hedge and private equity funds.

      Carried interest inherently has some of the properties of compensation, and some of the properties of equity.

      I’m not sure I buy this part at all. It’s compensation. Now, if the manager took his compensation, paid income taxes on it and then used what was left to buy equity in the partnership, then I’d see the equity interest. That’s not what happens. As you point out, private equity firms have a longer time horizon, and so a manager using the carried interest rule not only gets the benefit of the long-term capital gains rate, he (and it’s almost invariably a he) can *also* get the benefit of deferring the taxes over a number of years.

      Carried interest only resembles capital gains if you assume that time can be a capital investment. If you open that door, though, then *all* wages take on the characteristic of capital gains, as they all involve the investment of time as capital.

      1. “Carried interest only resembles capital gains if you assume that time can be a capital investment. If you open that door, though, then *all* wages take on the characteristic of capital gains, as they all involve the investment of time as capital.”

        Oh but that door is already open and rightly so. Say I am a skilled pastry chef who gets paid $80K per year working for a bakery. I decide to start my own bakery. Since cash is tight I “pay” myself only $40K per year, and thus have an income tax bill based on a $40K income. At the end of 5 years, I sell my bakery for a profit of $200K over whatever initial capital I put in, and I pay capital gains taxes on that profit. So over 5 years I’ve made exactly the same money (5 X $80K = 5 X $40K + $200K) as I would of as an employee. But I’ve transferred $400K from the ordinary income pool to the capital gains tax pool.

        1. Except that this door is not open to average workers, on the false assumption that wages completely and adequately compensate them for their time and that they are not making an investment.

  11. The name, to the debatable extent it’s really peculiar, is more a Mormon thing than a token of class. It’s true that Romney was named after J Willard Marriott (1900-85), who was rich as well as Mormon. But Marriott was named after his father, Hyrum Willard Marriott (1863-1939), who was just Mormon, not rich. (He raised sheep.) Will Marriott, finally, was named after Dr Willard Richards (1804-54), who also wasn’t rich, but was a well-respected Mormon leader. (He was Joseph Smith’s private secretary, and one of the men gaoled with him in Carthage Jail at the time of his murder.)

    Names carry cultural, religious & ethnic associations. They signal class position in part because class is associated with these other things. We don’t want our politics to devolve, even inadvertently, into mockery of candidates’ subcultural, ethnic or religious backgrounds, peculiar or not. There are more perspicuous ways of conveying the point about class, and other ways of winning.

  12. As someone who never liked his first name (not that it’s weird, like Romney’s; in fact, it’s the same as H. Ross Perot’s), I agree that it’s juvenile. If using it had any likelihood of winning the election, I wouldn’t care so much. But since it doesn’t–it would just make the schoolyarders who used the name look petty–let’s lay off.

    And yes, I think the same goes for the other side. Using Barack Obama’s name in a sneering way didn’t help McCain’s side one bit. And there’s a reason that the serious people in the McCain campaign didn’t do it.

  13. Depending on the audience you wanted to raise the hackles of, Gingrich could be called either “Newton” or “Leroy” (his middle name, somewhat downmarket if spoken in the right way)

  14. Harping on names has a very long political history. A Tudor agent, William Collingbourne, pinned up a famous jingle on the door of St. Paul´s in 1484, the last year of Richard III´s reign. It attacked his advisers William Catesby, Sir Richard Ratcliffe, and Viscount Lovell:

    The Catte, the Ratte and Lovell our dogge
    Rulyth all Englande under a hogge.

    Richard´s and Lovell´s emblems were respectively a boar and a wolf.

    Richard and Ratcliffe were killed at Bosworth Field; Catesby was beheaded a few days later; and Collingbourne had already been executed for treason by Richard. Lovell alone managed to disappear into Scotland.

    The lampoon entered popular culture, aided no doubt by later Tudor propagandists. It may have been influential at the time. Richard died becaue he had lost the support of a good part of the elites, including many of the surviving great barons and London merchants. Henry Percy for instance, the latest of the warrior dynasty that had held Northumberland against the Scots since 1066, failed to fight for Richard at Bosworth; resentment at the power of favoured upstarts like Ratcliffe doubtless came into it. The jingle would have made it harder to forget the grievance.

    Such tactics only work if they pick up something that´s already there. Hussein is a feeble weapon against Obama because, except to wingnuts, he´s not in the least Muslim. Willard could be dangerous to Romney because he is demonstrably both patrician and devious. If the GOP uses Hussein, Democrats should retaliate with Willard.

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