While the highest income tax bracket is currently taxed at 35%, the Romneys have estimated an income of $20.9 million for 2011 and a tax bill of $3.2 million, for an effective tax rate of just 15.3%. Similarly, Mitt's 2010 returns showed income of $21.6 million taxed at a rate of only 13.9%. (By comparison, the Obamas did file their tax returns last week, reporting income of $789,674 taxed at 20.5%.) The reason for Romney's sizable tax break is that most of his income comes from capital gains, dividends, and "carried interest" (his share in profits of private equity firm Bain Capital), all of which, particularly since the Bush tax cuts, have been taxed at a much lower rate than salary.
I don't begrudge Romney his financial success. But given his steadfast opposition to raising taxes on the wealthiest Americans, I do have to ask why Romney should be paying such a smaller share of his income in taxes than the rest of us. Or, to put it bluntly, why am I being forced to subsidize Romney's comfortable lifestyle (including a San Diego beach house so massive it has its own lobbyist and a planned private elevator for four of Romney's cars)?
This week, Congress will take up the question of tax equality as the Obama administration and Senate Democrats push a vote on the "Buffett Rule," which would automatically tax all income over $2 million at 30%, and phase in an increased rate of tax for income over $1 million. The proposal got its name from a 2011 op-ed by billionaire Warren Buffett, who famously asked why he should be paying only 17.4% of his income in taxes while his office staff, including his secretary, paid an average of 36%. Indeed, studies show that the 400 richest Americans currently pay only about 18% in taxes, compared with 30% during the Clinton economic boom. The Buffett Rule, although not expected to survive Republican opposition in the Senate, remains extremely popular with voters, nearly two-thirds of whom support it. And for a simple reason: it doesn't make any sense that Buffett, or Romney, should pay a lower tax rate than you and me.
Let's look at the potential justifications for taxing Romney less than the rest of us. Tax experts are fond of saying that all foregone tax revenue is a "tax expenditure": in other words, a government subsidy for the group receiving the deduction or exemption. For example, when the government foregoes $131 billion in tax this year by allowing deductions for mortgage interest, it's heavily subsiding home ownership. So what exactly is the government (and thus, we as taxpayers) subsidizing when we forego billions in tax on carried interest, which makes up a large portion of hedge fund compensation? Or when we slash the rates on capital gains and dividends, a key component of the Bush-era tax cuts? Most Americans do not earn significant income from dividends or capital gains, and only a small cadre of financiers (including Romney) will ever earn carried interest.
The old trickle-down argument goes as follows: "We're giving tax cuts to people who will spend and stimulate the economy, which in turn will more than pay for the tax cuts." Except that research has shown that wealthy people who get tax cuts do not put that money into the economy by spending; instead, they save it. When we give tax breaks to passive income like capital gains and dividends, we're subsidizing savings, not spending. Another argument goes, "Savings and investment help the economy too, and we should encourage them." But while savings and investment are good things, they come with their own rewards in the form of returns on investment, so there's no need for huge government incentives. When was the last time someone told you they weren't investing their excess income because the government didn't make it worth their while?
What about this one: "Taxing 'job creators' at a lower rate enables them to hire more workers, and add jobs to the economy." You've heard it before, and you'll hear it again from Romney and the Republicans many times this year. It's still wrong. Analysis shows that businesses make the decision to hire based on the business cycle, not the tax code. If you give them a tax cut, it may increase profits, but not jobs.
One argument against the Buffett Rule that you probably won't hear, except maybe whispered privately at a country club, is that the wealthiest few Americans worked hard for their money and are entitled to keep every bit of it they can. I don't think I can put the response to that any more eloquently than Elizabeth Warren:
"[T]here is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you....But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
"Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."
Governor Romney, I'm not trying to take away your big beach house in La Jolla through socialist redistribution or "class warfare." But it's my tax dollars that enabled you to build that beach house. Can you explain exactly why it is that your tax rate should be half of mine?