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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?

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"So you think it is fair?" interviewer Scott Pelley asked.

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"Yeah, I think it's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work," Romney replied.

The Romney household, for the record, derived about half of its $13.7 million in income from capital gains in 2011, with the other half coming essentially from dividends (also typically taxed at 15 percent) and interest income. Deductions for charitable gifts and other taxes paid brought taxable income down to $9 million for Romney and his wife, Ann. Their total tax bill was about $1.9 million. That works out to 21.5 percent of their taxable income, and 14 percent of their adjusted gross income. (They claimed a smaller deduction than they were entitled to, to conform to a previous campaign statement that Romney hasn't paid at a rate lower than 13 percent in the past decade.) [Editor's note: The original paragraph has been changed to more accurately describe the Romneys' tax liability.]

Why to raise taxes on capital gains

Opponents of giving preferential tax treatment to capital gains take a different view on both economic growth and fairness.

A major theme for them is that income inequality has been widening, with no sign that the economy is becoming stronger or healthier as a result.

The top 400 households paid 16.6 percent of their income in the federal income tax on individuals in 2007, according to Internal Revenue Service data tracked by the liberal Center on Budget and Policy Priorities. That's down from 30 percent in 1995, the group said in a 2010 report.

"The decline in effective tax rates at the very top is due in large part to the capital gains tax cuts enacted in 1997 and 2003," which left the tax rate on long-term capital gains at 15 percent, the report said. "The top 400 taxpayers derived two-thirds of their income from capital gains and qualified dividends in 2007."

It's not just that tax rates have fallen for the rich. It's also that, in parallel, a rising share of all household income is arriving in the form of investment income rather than wages. The nonpartisan Congressional Budget Office identified this as one important reason inequality of income has widened.

After-tax income grew by 275 percent for households in the top 1 percent of the income distribution, between 1979 and 2007, the CBO analysis found. By comparison, after-tax income grew about 40 percent for Americans in the middle 60 percent by income.

Dean Baker at the liberal Center for Economic Policy and Research argues that there's nothing unfair about taxing dividends or capital gains, especially in Romney's case. The bulk of Romney's income comes from his stake in Bain Capital, Mr. Baker says in a recent blog post. Because the firm is organized as a partnership, its income hasn't already been taxed at the corporate level.

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