Bloomberg: Unlike Romney, I pay the highest tax rate

In a case of dueling billionaires, New York City Mayor Michael Bloomberg said Wednesday that unlike Mitt Romney's 15 percent tax rate, he personally paid "the highest personal income tax rate," or 35 percent. The reason for the differential between the two billionaires' tax rates is simple: Most of Bloomberg's income is derived from holdings in his media empire, Bloomberg, LLP, which is taxed as ordinary income at the highest city, state and federal rates. Conversely, a large portion of Romney's income is "carried interest," which is taxed at a capital gain rate of 15 percent.

I know what you're thinking: This can't be legal. But it is because the IRS has carved out a special dispensation for many hedge fund and private equity executives that allows them to pay a lower income tax rate on their income. Mayor Bloomberg probably upset some of those hedge fund pros in Greenwich, CT when he said that the loophole should be closed, noting "If it were up to me, I would end the concept of carried interest." Bloomberg's comments, at a news conference in the Bronx, were reported by the New York Times.

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Billionaire Warren Buffett has also advocated the elimination of the carried interest provision as a way to put a small dent in the national debt and to make the tax code a little more equitable. Thus far, the massive lobbying effort on behalf of the hedge fund industry has been powerful enough to maintain the status quo.

The tax code could probably stand a little tinkering because the oft-repeated notion that the rich are paying more than both middle and lower income families does not hold up to scrutiny. As my CBS MoneyWatch colleague Mark Thoma explained yesterday, "the rich are doing better than ever, tax rates are at historic lows for this group, and their share of taxes has not risen by as much as their share of income." Additionally, when factoring in payroll, state and sales taxes, the lower and middle class tax burden looks a lot worse than that of the high earners.

Billionaire tax burden may seem a little out of this world, but so too is the current state of the U.S. tax code.