It’s no secret that Mitt Romney is rich. He was born rich and got mega-millions richer as a financier. Nor is it a secret that his income is mostly taxed at 15 percent, a far lower rate than middle-class grunts pay. Nor does he have any obligation to pay more in taxes than he legally owes.
The problem releasing tax returns poses for the former Massachusetts governor is as that he apparently has no problem with what they reveal — a messed-up tax code that magnifies wealth at the top while helping feed our raging deficits. Mitt has basically held that special tax deals are what get leveraged-buyout artists like himself up in the morning, and that’s good for America. The second part is not true.
For a vivid picture on how evolving tax laws have wrecked America’s fiscal standing, consult Bruce Bartlett’s new book, “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.” An economist in the Reagan White House, Bartlett does not endorse tax policy as a means to even out wealth, but to pay America’s bills in the most efficient manner.
For a historical perspective, consider what the Tax Reform Act of 1986 asked of the upper incomes. Ronald Reagan wanted to lower the top income tax rate to 28 percent, from 50 percent. Democrats said they’d go along, if Reagan agreed to end the special low rate for capital gains (profits on investments), which was then 20 percent. He did, and what many remember only as tax cuts included a hike in the effective capital gains tax rate for top earners to 28 percent.
Bartlett writes that Reagan regarded raising the maximum capital gains rate as “a reasonable price to pay for getting the top rate on all income down to its lowest level since the 1920s.”
Tax policy experts must grapple with fairness issues. One is that capital gains reflect inflation, in addition to profits.
But another is that the richer you are, the more of your income is likely to be capital gains. For taxpayers with an adjusted gross income of under $75,000, only 1.8 percent on average comes from capital gains, according to the Tax Policy Center. For taxpayers with adjusted gross income of $1 million or more, 39.5 percent derives from capital gains (and that doesn’t include dividends and interest income, also taxed at 15 percent).
When Republicans took over Congress in 1994, they pushed President Bill Clinton to support cutting the maximum capital gains rate to 20 percent. In 2003, President George W. Bush and the Republican Congress shrunk the rate further to 15 percent. In 2010, President Obama agreed to extend that low rate for two more years.
Executives in the private-equity business — folks like Romney — enjoy an especially outrageous loophole. The magnificent management fees they earn from their work get magically treated as capital gains, rather than as ordinary income. This kind of income is called “carried interest.”
The immensely rich mayor of New York City, Michael Bloomberg, has refused to condemn Romney for profiting from the carried-interest loophole. It is legal, after all. But he questions why it is legal. Bloomberg says most of his income comes from his media empire and is taxed at the highest city, state and federal rates.
Romney clearly does not want to share his intimate tax secrets with the world, but since that’s unavoidable, he might as well turn them into a teachable moment. The lesson should be why people like him ought to pay more taxes. If he goes there, Romney could take some of the “at-least-he-has-guts” momentum back from Newt Gingrich. Does he have the guts?