Is Romney Paying His Fair Share?
This is the time of year when the mailbox goes from yielding holiday cards to W-2s, 1099s and the income tax workbook from the accountant sure signs that tax time is rolling around again. But for anyone paying attention to the Republican debates, income taxes have already been on our minds. Every debate moderator and each of his opponents have been pressuring millionaire former Massachusetts governor Mitt Romney to reveal his recent tax returns: How much did he pay and was it his “fair share.”
He complied, and here are the salient details. The Romney family income for 2010 was $27 million; his federal income tax was just more than $3 million, which equates to a rate of about 13.9 percent. His returns also revealed his charitable donations were more than $3 million mostly to the Mormon Church true to his commitment to “tithe” (donate 10 percent) to his church. My Google source (I’d seen these same figures on Fox News) added for perspective that the 13.9 percent would be about the same rate for a working family earning $80,000.
In explaining the IRS rules under which Romney calculates his taxes, i.e., long-term capital gains, the source was less neutral: “This allows Mr. Romney to amass wealth under rules very different from Americans who take home a paycheck.” Ooooh, “amass wealth!” That can’t be good, we are being led to think. As the saying goes, “It takes money to make money!”
Technically, “ordinary income” is wages, interest, dividends, business income and rental income the means by which most of us make a living. Capital gains is the amount by which the selling price of an asset exceeds the purchase price; the gains only realized when the asset is sold. The asset can be real estate, stocks and bonds (mutual funds), collectibles, royalties and commodities (gold).
Although one doubts it could be found in the existing tombs of tax code, the rationale for lower capital gains (CG) tax rates can be reasonably deduced: 1) Lower CG rates encourage investment in higher risk enterprises, thereby promoting progress on all fronts. 2) In some cases, lower CG rates compensate the investor for taxes that have already been paid at the corporate level. 3) Lower CG rates encourage more cash turnover, thereby stimulating the economy.
But perhaps the most important thing to know: The capital gains tax rate isn’t just available to millionaires like Romney; it is available to all of us. It’s just that all of his income qualifies for it. When we sell a mutual fund or any piece of real estate, our profit is taxed at the same rate as Romney’s.
So we can see that this red herring rhetoric about the “unfairness” of billionaire Warren Buffett’s tax rate being lower than his secretary’s, it compares apples with oranges (excuse the fish and the fruit in the same sentence). He is taxed at the CG rate, and she at the ordinary income rate. Nevertheless, of course, Romney and Buffett both contribute far more to the U.S. Treasury than their secretaries. We shouldn’t confuse the rate with the cash.
So is Romney paying his fair share? In the context of a system where half of all Americans pay no federal income tax, with a tax bill of $3 million, he is indeed.