Mitt Romney's 14 percent tax bite: your guide to deciphering what's 'fair'
Many millionaires pay an effective tax rate much closer to Mitt Romney's 14 percent than to the official 35 percent top bracket. Preferential rates for investment income, including capital gains, are the reason. Is it time to change that?
Mitt Romney paid taxes last year equal to about 14 percent of his income. That's an effective tax rate much lower than the top marginal tax rate of 35 percent. [Editor's note: The first sentence has been changed to correct an error mischaracterizing Mr. Romney's income.]Skip to next paragraph
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And as President Obama has publicized, his Republican challenger for the White House is not alone: Many people with incomes in the millions pay an effective rate much closer to Mr. Romney's 14 percent than to the official 35 percent top bracket.
Is that fair? Is that good or bad for the economy?
Those questions have become central to the economic debate between the presidential candidates, and not just because Romney is so rich (with wealth estimated to be as high as $250 million).
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The president has called for a "Buffett rule," named after billionaire Warren Buffett, aimed at ensuring that millionaires pay at least 30 percent of their income in federal taxes. He says America can't afford to continue on a course of tax cuts for the rich at a time of large federal deficits.
Romney, in effect, argues that the nation can't afford not to keep taxes low for the rich. He says Mr. Obama's policies would hurt job creation in a fragile economy.
At the heart of their difference is the question of whether investment income, including capital gains, should be taxed at lower rates than wages and salaries. Currently it is, and that's why Romney and other millionaires often pay such a low effective tax rate.
Beyond that, it's also a debate about public perceptions of fairness in the tax code.
Here are some of the main arguments made by each side.
Why to keep capital-gains taxes low
As America's rich have grown richer in recent years, they are also paying an expanding share of all federal income taxes. Tax rates have fallen for all income groups, which helps explain why an estimated 46 percent of Americans owed no federal income tax last year.
That's a sign that Obama's tax-hike plan is misguided, say many supporters of low taxes for the rich. The real problem is federal spending, they argue, and if that is tamed then tax rates can remain low for everyone. A kicker, they say, is this truism of human behavior: When tax rates go up, taxpayers will scurry to find ways to avoid the levies, and the planned boost in federal revenue may fall short of expectations.
Beyond that, other supporters of low capital-gains tax rates argue that investment activities deserve preferred treatment. The argument is twofold.
On the economic front, a low (or even zero) tax rate on capital would encourage savings and investment, by raising after-tax returns for investors. In turn, that could make it cheaper for businesses to raise money.
On the fairness front, fans of low rates warn against taxing the same income twice. Romney made this case in a recent "60 Minutes" interview. "One of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent," he said.