Romney and taxes

We can all be grateful that the raucous Republican primary race has brought to the fore issues Republicans usually don’t like to discuss. One of them is the federal tax code, which is rigged to favor financial wheeler-dealers like Mitt Romney and his fellow private-equity multimillionaires and billionaires who pay lower tax rates than ordinary citizens do.

For his part, President Obama has proposed what he calls “the Buffett rule,” after Warren Buffett, the multibillionaire who has publicly stated that it is wrong for him to be taxed at a rate that is much lower than his secretary’s. The Buffett rule would mandate that those making more than $1 million a year would pay at least 30 percent in taxes.

Buffett and Romney, whose tax rate was less than 14 percent on earnings of more than $20 million in 2010, pay a lower rate because their earnings come mostly from investments, which are taxed at the current capital-gains rate of 15 percent, far less than the rate applied to labor income, which can be as high as 35 percent. They also pay less in payroll taxes because the Social Security tax does not apply to any income above $106,800.

The capital-gains rate was set at 28 percent during the Reagan administration and went up to 29 percent early in the Clinton administration. Congress began lowering the rate in 1997, when Clinton agreed to a tax cut for the rich in return for creation of the Children’s Health Insurance Program. Then, in 2003, President Bush and an army of Wall Street lobbyists convinced Congress to adopt today’s ultra-low rates—the lowest since the Herbert Hoover era.

The rationale was that doing so would free up more money for investment, spurring the economy. Obviously, it hasn’t turned out that way. In fact, analysis has shown that capital-gains tax cuts have little or no effect on economic growth.

In his State of the Union speech last week, President Obama pointed out the illogic of these tax breaks for the rich. When wealthier Americans get tax breaks they “don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference—like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet.”

We can thank Mitt Romney for offering his case study on why this unfair tax situation has to change.