Obama Takes Swing At Carried Interest

Obama, who won re-election in November largely on his promise to raise rates for the wealthiest Americans, pushed through a legislative package at the beginning of the year that raised rates for individuals making more than $400,000 a year and households making more than $450,000 a year.

In an interview with CBS, Obama said the United States could reduce the deficit and invest in education without raising rates again if it enacted “smart spending cuts” that trimmed government waste, reformed expensive healthcare programs, and closed lucrative loopholes.

“I don’t think the issue right now is raising rates,” Obama said in the interview, broadcast live before the Super Bowl football game.”There is no doubt we need additional revenue, coupled with smart spending reductions in order to bring down our deficit. And we can do it in a gradual way so that it doesn’t have a huge impact.”

Obama indicated he would seek to end deductions that are not available to all Americans, singling out carried interest, which refers to the tax rate paid by many private equity managers, venture capital and real estate partnerships. Obama and many Democrats have repeatedly criticized the tax break as unfair and called for carried interest to be taxed as ordinary income. The tax break was the key reason for the low tax rate paid by Obama’s 2012 Republican presidential challenger, former Massachusetts governor and private equity executive Mitt Romney.

“We just want to make sure that the whole system is fair, that it’s transparent, and that we’re reducing our deficit in a way that doesn’t hamper growth,” Obama said.

Individuals who benefit from carried interest took a hit in the year-end budget deal that averted the “fiscal cliff” set of spending cuts and tax increases. For incomes above $400,000 per individual, or $450,000 per family, capital gains and dividend taxes were increased to 20 percent from 15 percent.

“Given the 58 percent increase in taxes paid on capital gains as part of the recent deal to avert the fiscal cliff, it is our hope that any tax reform effort in 2013 will be about crafting policies that incentivize economic growth,” said Steve Judge, president and chief executive of Private Equity Growth Capital Council, responding to Obama’s comments.

The budget law permanently extended ordinary tax cuts for incomes below $400,000 per individual, or $450,000 per family. Income above that level is now taxed at 39.6 percent, up from 35 percent.

Asked about the unexpected contraction of the U.S. economy in the fourth quarter, Obama said a dramatic cut in defense spending because of fears about the “fiscal cliff” had overshadowed strong manufacturing and a rebounding housing market. He blamed dysfunction in Washington for the hit.

“Washington cannot continually operate under a cloud of crisis. That freezes up consumers. It gets businesses worried,” Obama said. “There is a way for us to solve these budget problems in a responsible way through a balanced approach that the vast majority of people agree with. If we do that, there’s no reason why we can’t have really strong growth in 2013.”

Jeff Mason is a correspondent for Reuters in Washington, D.C.