How does the uber-wealthy Romney pay so little in taxes?

Romeny's low tax rate, and how he achieved it, provides an important lesson in how tax laws need to change.

By , Guest blogger

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    Republican presidential candidate Mitt Romney speaks to a crowd during a campaign event, in Warwick, R.I., Wednesday, April 11, 2012.
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Now that Mitt Romney is the presumed Republican candidate, it’s fair to ask how he made so much money ($21 million in 2010 alone) and paid such a low rate of taxes (only 13.9 percent).

Not only fair to ask, but instructive to know. Because the magic of private equity reveals a lot about how and why our economic system has become so distorted and lopsided – why all the gains are going to the very top while the rest of us aren’t going anywhere.

The magic of private equity isn’t really magic at all. It’s a magic trick – and it’s played on you and me.

Recommended: Six ways the rich really do get richer

Jake Kornbluth and I have made this 2 minute video that explains it all in eight simple steps. (Thanks to MoveOn.org for staking us.)

By the way, the “other people’s money” that private equity fund managers (as well as other so-called “hedge” fund managers) play with often comes from pension funds that contain the savings of millions of average Americans.

The pension fund managers who dole out our savings to private equity and hedge-fund guys also take a hefty slice in bonuses. And like the others, they bear no risk if their bets later turn bad. They get their bonuses regardless.

Nor are any of them — private-equity, hedge-fund, or pension-fund managers — personally liable for doing adequate due diligence. They can bet our money on the basis of no more information than what they had for breakfast.

But if these funds lose, you lose. That’s what happened in 2008 and 2009. Some of the losses are also shifted to the government’s Pension Benefit Guaranty Corporation – which means taxpayers lose.

It’s a giant con game, and it continues to this day.

Here’s what has to be done to stop it:

1. End the “carried interest” loophole that allows private-equity managers like Mitt Romney to treat their income as capital gains, taxed at 15 percent, even though they don’t risk a dime of their own income. Their earnings should be treated as ordinary income.

2. Hold the managers of private-equity funds, hedge funds, and pension funds to a “due diligence” standard. So if the funds lose money and these managers didn’t exercise due diligence, the Pension Guaranty Corporation can claw back their bonuses.

3. Raise the capital-gains rate to match the tax rate on ordinary income – especially for short-term investments. Give a tax preference only to “patient capital” – that is, for investments held for, say, five years or more.

4. Resurrect Glass-Steagall.

Mitt and others like him won’t like any of these reforms. They’d eliminate the humongous profits they’ve enjoyed at the expense of the rest of us.

But these reforms are necessary if we’re to take back our economy.

Get #BeyondOutrage.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on www.robertreich.org.

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