Thursday, January 19, 2012

Why 15% Should Matter to the 99%

This week Mitt Romney let slip the real reason why he's reluctant to divulge his tax returns. It's not how much money he earns that he's hiding - we're all aware that it's a considerable sum - it's the tax rate he pays on that income that is controversial.

Because Mitt's income is mostly from investment earnings, he pays the capital gains rate of 15% on his millions rather than the current top marginal rate for wages of 35%, or even the average middle-class top marginal rate of 25%. This has left his supporters to explain why this very wealthy man should pay a lower tax rate than most middle-class Americans.

Capital gains, we are told, are very special because of the risks involved. Not every investment pays off, after all. Very true. But, of course, that's why losing investments can be written off as business expenses and deducted from one's over-all income, reducing one's taxes. So, why, when an investment is successful should it be taxed differently than regular employment income?

Well, 15% of $1,000,000 is still more than 25% of $75,000! Kinda like how, if you buy in bulk at Costco, you get a lower price on food. That's fair, right? Well, in as far as that analogy does hold water, the tax code already has provisions for the "bulk buyer" (IE: additional children = additional deductions). In my case, my home (modest by CA standards, but expensive by national standards) gives me quite a mortgage interest deduction. Add that to my business and other expenses and I probably deduct as much from my income than a minimum wage worker earns in a year.

But on the taxable portion (after deductions), I gladly pay a rate that's somewhat higher than the minimum wage worker because of my relative success. And somebody who earns 10-20 times what I do should pay a little higher yet. Certainly no less a percentage. So, why so much lower?

Well, they say, the rich need an incentive to invest. Why bother if your earnings after taxes will barely keep up with inflation? When I hear this argument I always have to reply that I don't think the rich are as lazy as you think they are. I have faith in their entrepreneurial drive that they'd still invest, create, and build, even if capital gains were taxed as regular income. As long as the tax rate is below 100% any gains are still better than a mattress full of cash (and, no, I'm not suggesting a 100% tax).

If you buy that "incentive to beat inflation" argument, then people should be turning down C-level jobs that hit the 35% marginal rate, and even middle-management positions in the 25% range, and all the MBAs would be looking to work in mail rooms. It turns out, however, people prefer to have 65% of $500,000 over having 75% of $75,000. So, why does investment income require a tax rate so much lower than income from labor?

Gosh! You're just envious! After all, everybody has the opportunity to invest and get the tax benefits of capital gains! Well, perhaps we do have that opportunity, but not to the same extent. According to the Washington Post, "The 400 richest taxpayers in 2008 counted 60 percent of their income in the form of capital gains and 8 percent from salary and wages. The rest of the country reported 5 percent in capital gains and 72 percent in salary." When you defend 400 out of 312,877,450 with "everybody can do it," it's more than a bit of a stretch.

Here's the thing about all this in relation to Willard Mittens Romney: the millions he makes each year from capital gains are not even from investing his own money. There is no risk involved. Mitt's millions are part of his retirement agreement with Bain Capital. Every year he gets a nice slice of Bain's profits, even though he hasn't worked there in 13 years.

Of course, while most of his income comes from Bain and other capital gains, Mitt does work part-time as a public speaker. He describes his income from speaking fees as "not very much." It's actually $374,000/year. As a point of reference, $380,000 is the cut-off point for being in the top 1% of earners.

Capital gains have not always been taxed as low as 15%. This rate is the result of tax cuts (from both GW Bush and Clinton) that were supposed to inspire and encourage the wealthy to invest more, thus creating new jobs. As you can see, that plan didn't quite work out.

Many Republicans are now pushing for a new rate on capital gains: 0%. Romney, in his defense, is not one of them (although he does have other tax cuts in his plan). But if Newt Gingrich is elected, Mitt's tax bill will fall to nearly nothing.

So, please, remind me again, why are capital gains taxed so much lower than income from actually working for a living?


  1. >But, of course, that's why losing investments >can be written off as business expenses and >deducted from one's over-all income, reducing >one's taxes.

    Ken, it may be news to you, but only $3000 can be deducted in a tax year. Of course, you know that, but conveniently didn't mention this in your post.

    1. Yes, there's a limit of $3,000 of deductions for you or me (losses against "ordinary" income), but the point of the blog post is that folks like the Romnefellers operate by a different set of rules.

      Mitt managed a deduction of $4.8 million on his 2010 return for "carried-over long-term capital losses." Considering the $3,000 limit for us, again I ask, how is this fair?

      Source: (scroll to section E)


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