35% versus 15%
Mitt Romney garnered considerable media attention by his rambling answer to the question of whether or not he would make his tax returns public. While Mitt should have just said “yes”, he eventually noted that he probably paid at a tax rate of about 15%. He did note that he probably paid a higher percentage on his speaking fees, but he said he didn’t make much from that-a mere $374,328 last year.
While the capital gains tax caps at 15%, income tax caps at 35% (for those who have a taxable income of over $388,350). By way of comparison, a person who earns $8,701-35,350 pays 15% income tax. Naturally, the actual percentage will vary based on factors such as deductions. However, it is certainly interesting that someone like Romney (who makes a fortune from capital gains) pays at the same rate as a person who makes vastly less by working.
The stock justification for this disparity is that it is intended to promote investment and that investment drives the economy. However, the fact that other income (like paychecks) can be taxed at much higher rates would seem to indicate that working for a living is regarded as less important than receiving profits from investments. This does seem to be something of a mistake: after all, without people actually doing things, there would be no point for the capital investments. That is, there would be no actual things to invest in (well, other than the arcane results of financial engineering). As such, if the low tax rates on capital gains are intended to promote investment, it would seem that comparable tax rates should be placed on other income to encourage people to work.
After all, it has been common for politicians and pundits to claim that higher tax rates on capital gains will destroy job creation because job creators will be de-motivated from investing. However, that logic would seem to entail that the higher tax rates on other income should also de-motivate people. That is, people should stop working because of the higher tax rates. Perhaps this explains the unemployment numbers-just as the pundits predicted, taxes have destroyed their motivation to create value. In fact, if the pundits are right, it is a wonder that anyone who makes more than $35,350 goes to work at all-after all, they have to pay more than 15% and this is the level that is apparently deemed to be the maximum percentage that investors can tolerate.
This disparity not only indicates the perceived value of work versus investment, but also the political influence. Those who derived most of their income from capital gains (like Mitt Romney) tend to be wealthy and generally tend to have far more influence than those who merely work for a living. Also, there is the obvious fact that the folks who write the laws tend to be heavy investors as well. As such, the tax laws are written to benefit the wealthy-which is hardly shocking. While the wealthy do have to pay some taxes, even this modest burden is seen as grotesquely unfair by some of them and some of their stalwart allies (who also tend to be wealthy). Romney is a natural poster boy for the incredible disparity in American incomes and his various comments nicely show the disconnect between most of the top 1% and the rest of America.