[Mitt Romney] makes a lot of money. Big deal. He doesn't actually work for a living (he shows no wage or salary income). Instead, he lives off his investment income and a cushy retirement deal with Bain Capital. Again, big deal. For the returns, see here.
Romney, like tax-minimizing bad boys before him, has turned the spotlight on a key issue of fiscal fairness. And in his case, the specific issue concerns investment income.
Over the last two years, Romney has paid an average tax rate of 14.7 percent. That's more than most Americans pay but probably less than someone of his substantial wealth should pay (at least judging from the popular reaction to this revelation).
But the real question is why he paid so little. And the answer is the tax break for capital gains. Generally speaking, realized gains from investments are taxed at 15 percent. There are a variety of reasons why this low rate might be considered reasonable. It may, for instance, help encourage saving and investment, though the economic data on that point are ambiguous. Also, the low rate might compensate for the fact that many capital gains have already been taxed at the business level under the corporate income tax. The individual tax break helps alleviate the burden of double taxation. (Although much of this income has never been taxed at the corporate level, thanks to an army of skilled tax planners advising every major corporation. And not all capital income derives from corporations.)
Even if we accept these justifications for the capital gains tax break, there is at least one very good argument against it. It's simply not fair...
... Investment income should be taxed at the same rate as labor income. And it's not just liberals who feel this way...
View TaxAnalysts' Joe Thorndike's opinion in its entirety on TAX.com.
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