Former Massachusetts Gov. Mitt Romney estimates the federal tax rate he pays on most of his income is about 15 percent because it comes from his past investments.
That may sound shockingly low to many middle-income Americans who pay tax rates of 25 percent to 28 percent or higher, but the 15 percent is in the federal tax code for a good reason: to encourage capital investment, which is the mother’s milk of a growing economy.
Mr. Romney, who said he will release his tax returns about April, pays the same tax rate anyone else does on income from capital gains from the sale of stocks and bonds or from dividends and other securities.
Mr. Romney is a millionaire, but any American who buys a share of stock and sells it for a profit, is paid dividends from that stock or other investment, or sells a home, would pay the same rate he does.
Investments that pay a return in long-term capital gains or dividends are not just for the wealthy. Tens of millions of workers who invest in 401(k), IRA or Roth savings plans, through their mutual funds or stock portfolios receive the same tax break, and that income is taxed at 15 percent.
If you were to buy stock in Verizon, which is about $39 a share, it would pay you a yearly dividend of $2. That’s an effective yield on your investment of 5.1 percent - not bad at a time when most banks are paying less than 1 percent.
Buy some AT&T stock at $30.38, and it would pay you $1.76 per share, an annual yield of 5.8 percent. Where can you get that in today’s economy? But the federal tax on that income would be 15 percent, too.
President Obama, who wants to raise income taxes on big corporations, small businesses that file as individual taxpayers, investors and almost anyone who makes big money, thinks the 15 percent tax is too low.
He’s fond of relating billionaire stock investor Warren Buffett’s complaint that his private secretary at Berkshire Hathaway pays a higher income tax rate than he does. The reason: Virtually all of Mr. Buffett’s income is from capital gains and other forms of investment, so he pays 15 percent, too.
You never read in the newspapers that his secretary is also an investor, and income from her investments also are taxed at the 15 percent rate. Earned income is taxed at the regular rates between 10 percent at the bottom and 35 percent at the top.
For the past three years, Mr. Obama has been beating up rich people, saying they are not “paying their fair share” in income taxes when, in fact, they pay most of the income taxes that flow into the U.S. Treasury. In the political world we live in, this kind of rhetoric is known as class warfare, pitting one income class against another. It also is sheer demagoguery.
But the history of capital-gains taxes in recent decades reveals that presidents in both parties have cut the tax rate to increase capital investments in the economy and boost growth.
In 1997, President Clinton signed a Republican tax-cut bill that slashed the capital-gains tax rate from 28 percent to 20 percent. His critics in his party’s extreme left wing said it would benefit the wealthy and the lost tax revenue would drive up the deficit.
On the contrary, Mr. Clinton’s capital-gains tax cut fueled an investment boom in the technology sector and the rest of the economy; taxable capital gains nearly doubled over the next three years and led to a budget surplus. Notably, as a result of an explosion in new jobs, unemployment fell below 4 percent.