With the campaign season in full swing there has been a lot to catch our attention lately. Mitt Romney has been under particular scrutiny as he is one of the front runners for the Republican Party’s nomination to face President Obama in the general election.
Relenting to the calls from his opponents for transparency, he recently released his tax returns. Not only does the information shine a light on Mr. Romney, it puts the issue of fairness in our tax system back onto the front page.
The Washington Post: Mitt Romney’s tax returns shed some light on his investment wealth
Some of the highlights from the returns:
- 550 – Total pages filed for 2010
- $42.6 million – Amount of reported income for 2009 and 2010
- 13.9% – His effective tax rate
- Zero – Amount of wages earned
Mr. Romney’s tax return is being criticized as an example of how our tax system is rigged to favor those who control capital (wealth). Much of the income that was reported on his return was in the form of something called carried interest.
This income was from profits Mr. Romney received through his participation in Bain Capital, a private equity firm that he helped co-found in the 1990s. There is plenty of criticism pointed at how private equity generates profits – most notably from his Republican opponents – but also at how this profit is taxed.
There is a special provision in the tax code that allows for capital gains treatment for carried interest. This means that Mr. Romney’s tax rate is capped at 15% on this income instead of 35%, if it were treated as ordinary income (as many critics say it should be).
It’s getting harder for those in the private equity industry and their Congressional allies to argue not only that this is good tax policy, but that it is fair. Most Americans hold their investments in tax deferred accounts which they funded through payroll contributions. When withdrawals are taken from these assets they are taxed at ordinary rates. No loophole for the middle class here.
Income disparity is at an all time high and the anger directed at the wealthy is being stoked yet again. Higher tax rates for the Mitt Romney’s in this country are being pushed by the President and even by some of the wealthy themselves.
Warren Buffett points to the fact that his secretary pays taxes at higher rates than he does because most of her income is derived from wage compensation while his comes overwhelmingly from investments.
The decade of the 2000s saw overall tax rates decline while GDP growth rates fell. We do believe that tax rates are going to rise, especially for those whose incomes are derived from investment sources.
Our long-term issues of entitlement funding, in particular healthcare, will likely require higher tax revenues even though some of our current political leaders lack the ability (or the nerve) to face this reality.
Photo credit: Gage Skidmore
