From 2007 to 2010, the Democratic House tried four times to kill the carried-interest tax break. Senators of both parties protected it.
At the heart of the debate lies a loophole—the carried-interest provision—that allows private equity executives like Romney to treat their income as capital gains taxed at a rate of 15 percent, rather than the 35 percent top rate that applies to ordinary income. Many Democrats and a few Republicans regard this as an unconscionable sop to the rich. When they controlled the House from 2007-2010, Democrats passed legislation four times to end it. But reform has never advanced, partly because senators—including some Democrats—have interfered. (Wall Street is a major source of Democratic campaign contributions.) When carried interest first came up as a political issue five years ago, Senator Charles E. Schumer (D-N.Y.) killed any chance of reform by insisting that any law threatening the loophole also apply to investment partnerships in other industries, such as oil and mineral exploration. That caused a broad enough outcry from financiers to stop the bill, and the issue fell into limbo.
Romney has changed that. His 2010 and 2011 tax returns, released under duress on Jan. 24, show he paid a rate of just 13.9 percent and made $13 million in carried interest—this during a period of self-described “unemployment.” Overnight he came to personify the special treatment given to the rich, putting a name, face, and tax return to what had previously been an abstraction. “His tax forms show the inequity of that exemption,” says David Min, a former counsel to the Senate Banking Committee who is now a scholar at the liberal Center for American Progress. “At this point, I don’t think anyone wants to be publicly opposed to ending it.”