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After refusing for weeks to release his taxes, Mitt Romney now says he’ll do so — by tax day, April 15. But the real news is what Romney has now admitted about his taxes.
It’s not how much Romney earns. Everyone knows he’s comfortably in the top one-tenth of one percent.
It’s how much he pays of it in taxes. Romney says he pays a tax rate of “about 15 percent.”
That’s lower than the tax rate most of America’s middle class face and far lower than the 35 percent top rate after the Bush tax cut. (To put this in perspective, recall that the top income tax rate under Dwight Eisenhower was 91 percent.)
Newt Gingrich immediately pounced on Mitt’s admission as evidence that Newt’s proposed flat 15 percent tax is ideal, and wants to call it the “Romney tax.” Newt’s flat tax is a fraud. It would dramatically lower the taxes of most of the top 1 percenters and increase the taxes of most of the rest of us.
The real smoking gun is how Romney manages to pay only 15 percent on what’s been his money-gusher of compensation from Bain Capital. Romney hasn’t released his tax returns yet, but the most obvious answer is he treats his Bain income as capital gains — subject to the current capital gains rate of only 15 percent.
A loophole in the tax laws allows private-equity managers like Romney to treat their compensation as capital gains. It’s legal but it’s a scandal. Income from employment is employment income, period.
Private-equity managers cling to the technicality that the money they take out of their companies comes from the appreciation of assets they own and sell. That may be true, but it’s still income they get from their jobs. Common sense would dictate it be treated as ordinary income.
Congress has vowed for years to close this loophole. But somehow it persists. Even when Democrats have been in charge, they haven’t been able to close it.
Guess why. The managers and executives of private-equity funds are big donors to Republicans and Democrats alike.
Don’t call it the Romney tax, as Newt wants to do. Call it the Romney tax loophole. And let him explain why he thinks it’s justified.
© The Bay Citizen, 2012
Michael Ferro
Thanks Bob for sharing these important observations of what is so very obvious to anyone who can put Romney's public statements into context. When I saw on the news that Romney said he paid only 15% in taxes, it was clear to me that he pays less than I and I make a very small fraction of what he makes.
M L
The reason that capitol gains aren't treated as ordinary income is because in the vast majority of cases the money involved has already been taxed once. For almost everyone elimination of capitol gains would be devastating. In my case, which I think is very typical, my retirement funds are split 50/50 in IRA/401k pre-tax investments that will be taxed at the full pop once I start tapping into them. The other 50% is made up of what I had left from the rare "good" year, where my income was higher because of stock option exercises. Whereas business can income average, individuals largely cannot, so even though my average income is typical middle class, in those few years where my income spiked more than half of it disappeared into taxes, leaving me only a modest amount to invest for retirement. Some of that can migrate each year into a Roth, but most of it is subject to the cap gains rate every time it is "traded" or re-invested or when someday withdrawn.
The vast majority of people affected by the capitol gains tax have paid vast amounts in taxes already on that money. It is unfortunate that in all the populist rhetoric being spread these days, there isn't a little of my more typical perspective blended in with the hyperbole.
Gordon
But you paid taxes only on the amount that was invested, not on the gains you earned after that original investment, so the capital gains tax is not a double tax on the amount you previously paid taxes on, only the later increases...
M L
You pay taxes on the gains. Always.
The rate is a tad lower in order to incentivize people to invest in enterprise with its attendent risks versus just a fixed rate thingy.
Bill Abbott
M L writes, "...my income spiked more than half of it disappeared into taxes,..."
Where do you pay taxes? Or when are we talking about? I have grave difficulty believing "more than half" It sounds terrible. But is it true? And if its not true, what about the rest of your comments?
US maximum personal income tax rate is 35%. California State maximum personal income rate is 11%. 33% + 11% = 44%. Only on income above a pretty high threshold. I've seen more than one windfall, and the marginal tax rate on the windfall has been about 44% for a long time. Something less than half. You get to keep 56% and spend it any way you like. Long ago, the top marginal rate was 39%, and that + the 11% state rate would be 50%. But not more. You'd have to go a long way back to see a higher rate than 39% for ordinary income.
More importantly, if you put your extra income into a 401K you paid NO taxes on it. Zero. Considerably less than half.
You don't pay Social Security payroll tax on something that qualifies for a 35% marginal rate - you max out all the income-limited deductions long before you hit the maximum rate. So if what you are saying is correct, there's a piece of this story missing or someone is taking advantage of you.