Should Mitt Romney Pay More in Taxes? >
Warren Buffett Is Right
Mitt Romney should pay more to support the society that made his fabulous fortune possible
January 31, 2012
About Steve Wamhoff:
Steve Wamhoff splits his time as a Policy Analyst for ITEP and the Legislative Director of Citizens for Tax Justice. He has written reports analyzing proposals to cut or raise taxes for investors, alter the estate tax, close corporate tax loopholes, prevent offshore profit-shifting, and pay for healthcare reform and other initiatives. He has also written several reports analyzing the tax cuts already enacted under President George W. Bush and President Obama.
The revelation that Mitt Romney received an income of $21 million in 2010 and paid just 13.9 percent of that in federal income taxes has highlighted an enormous problem in our tax code. Income from investments (or income that is manipulated to appear to come from investments) is taxed at lower rates than income from work. And this is a huge benefit for the rich.
[Mitt Romney Releases Tax Info.]
Technically, the breaks that Romney enjoys are available to anyone with investment income, but the vast majority of this type of income goes to the rich. We recently calculated that about a third of taxpayers with incomes exceeding $10 million get the majority of their income from investments and consequently pay an average effective tax rate of 15.3 percent.
We then looked at taxpayers with incomes between $60,000 and $65,000 and found that just over 2 percent get the majority of their incomes from investments. In fact, over 90 percent of the $60,000-$65,000 group get less than a tenth of their income from investments, and consequently pay an average effective tax rate of 21.3 percent. That's a higher effective tax rate than those multimillionaires who get most of their income from investments.
[3 Myths About Mitt Romney and the Rich.]
How do multimillionaires justify their low effective tax rates? Many, like Warren Buffett, admit that there is no justification at all, and have asked the president and Congress to reform the tax code. Buffett finds it offensive that he pays federal taxes at a lower effective rate than his secretary does.
Others argue that special breaks for investment income are necessary to encourage investment. This is absurd, given that people with money invest in order to profit and that is motivation enough. But this argument is even more absurd in the case of wealthy fund managers like Romney, who use a loophole to characterize even their income from work as investment income to enjoy the lower tax rates. (This is the loophole for "carried interest.")
Still others, including Romney himself, argue that much of their income represents corporate profits that have already been subject to the corporate income tax of 35 percent before they were paid out as stock dividends. This is nonsense. At least a third of Romney's income took the form of "carried interest," which is actually compensation for his work in managing other people's money, and this is certainly not corporate profits.
[Will Dems Call New Tax Law 'The Romney Rule?']
Even in the unlikely event that all of the rest of Romney's income did come from corporate stock dividends or gains on the sales of those stocks, there's no reason to think that the corporations involved paid 35 percent of their profits in corporate income taxes. We recently studied most of the Fortune 500 corporations that have been profitable for each of the last three years and found that their average effective tax rate over the three-year period was just 18.5 percent. Thirty of these companies paid nothing at all.
Warren Buffett is right. People like him, and Mitt Romney, should pay more to support the society that made their fabulous fortunes possible.
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- Other Arguments
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#128298
No — Robbing the rich to pay poorly-run Washington is not fair, and not smart
DANIEL MITCHELL, Expert on Tax Reform and Supply-side Tax Policy at the Cato Institute
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#2160133
No — Mitt Romney paid 335 times what the average American paid in taxes
ANTONY DAVIES, Scholar at the Mercatus Center at George Mason University
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#3148130
No — Romney's generous even when compared to the top 5 percent of income earners
DANIEL HANSON, Economics Researcher at the American Enterprise Institute
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#46898
No — We should send the capital gains tax rate straight down to zero
ANDREW ROTH, Vice President of Government Affairs at Club for Growth
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#5112169
Yes — Income from capital gains and dividends is the largest contributor to rising income inequality in recent years
VISHNU SRIDHARAN, Program Associate with the Global Assets Project at the New America Foundation
Reader Comments Read all comments (3)
Neil Barron of MI 9:45PM February 02, 2012
Creeping Buffalo of CO 12:42AM February 01, 2012
David Jackman of VA 4:00PM January 31, 2012