Much has been made of Mitt Romney’s asserted 15 percent or so tax rate. There is both a material error and an irony to this story.
The release of Romney’s tax returns for 2009 and 2010 and a preliminary assessment for 2011 shows a remarkably consistent picture. First, he makes a pretty penny, but we knew that. His income is about $20 million a year, and he consistently pays about 15 percent in federal income tax. Most of his income is either dividends or capital gains, which are each taxed at 15 percent. The governor appears not to be a big fan of bonds, which are taxed at much higher rates, and appears to have earned relatively little wage income, which is hardly surprising given his political campaign.
A 15 percent rate on capital gains and dividends is the law, and no one credibly disputes that Romney paid what was owed under the law. Those who argue for higher taxes believe that those who make more should pay more. Well, in addition to paying about 15 percent in taxes, Romney consistently donates about 15 percent of his income to charity. These are sums that need not be squeezed out of taxpayers by threat of penalty but are given voluntarily to support efforts that the government acknowledges via the tax law are worthy of special consideration.
So, combining these two direct measures, about 30 percent of his resources are made available to the community at large, half of which is done voluntarily, half through the national government. The “fair share” brigade should be more than satisfied
To put these figures into perspective, the average federal income tax burden according to the Congressional Budget Office is about 9.3 percent.
The irony in all this, despite the catterwalling of the mainstream media—and even some of his opponents—about tax fairness and is that President Obama has consistently proposed raising the tax rate on capital gains and dividends to all of 20 percent. Any increase in these rates would be foolish and harmful to the economy, but even if the rates had been 20 percent and Romney had then paid about 20 percent of his income in taxes, would the media respond less rabidly? Not likely.
Why would it be an outrage under those circumstances for Romney to pay 20 percent and yet perfectly fine for Obama to propose that Romney pay 20 percent?
Put another way, has President Obama just been a softy all along when it comes to wealth redistribution? Or does he recognize, all heated political rhetoric notwithstanding, that high tax rates on capital hurt the economy, meaning it hurts workers and their families? It’s just one of those inconvenient truths that we can’t have a 15 or 20 percent tax rate on dividends and capital gains without collecting only 15 or 20 percent from the Mitt Romneys of the country.
That leads to the material error. He didn’t pay around 15 percent. There are at least two levels of tax; the 15 percent component is just one of the two. At the very least, he paid nearly 45 percent, but a chunk of this tax was collected before he even saw the remainder. Income from capital gains and dividends means the income was first earned by businesses, most likely corporations, which pay tax at 35 percent. So Romney paid his 15 percent only after the government had taken its 35 percent cut. That leaves Romney with a combined tax of 45 cents on the dollar of corporate earnings. (Warren Buffett, are you listening?)
And, in all likelihood, even before he invested the money where it is currently, some had been subjected to taxes on capital income repeatedly in the past—tax level three. And at some point a good chunk of it, perhaps all, was taxed at the individual rate as wage or salary income—tax level four. While these additional levels of tax are incalculable without knowing the governor’s entire financial history, it surely raises the tax above 50 percent and likely much higher.
With capital income subjected to two, three, four, or more levels of tax, consider again President Obama’s proposal to raise the tax on the last level of tax—the tax on dividends and capital gains—to 20 percent. By only raising it to 20 percent, Obama implicitly acknowledges the importance of private saving and investment. But as we see, the true rate is not 15 percent but something much higher. Either equity finance and business formation really matter, in which case Obama should propose to zero-out these taxes altogether, or they don’t matter, in which case raising the rate to only 20 percent is inexplicable. Obama should explain this conflict in views, but don’t hold your breathe.
Rather than exposing an example of an unfair tax system in which the rich appear not to pay their fair share, the recent Romney episode demonstrates in headline type the heavy true burden that falls on saving and investment in America and why we need tax reform to fix it. And for those who still seek that pound of flesh, watch those charitable contributions.