Some Prominent Rich People Have Lots of Money and Face Low Tax Rates

January 17th, 2012 at 10:41 pm

Republican candidate Mitt Romney believes his effective tax rate—the share of his income he pays in federal taxes is around 15%, or, as he put it, “probably closer to the 15 percent rate than anything.”

15% is the current rate on capital gains and dividends, which presumably comprise most of his income.  The figure below, using data recently released by the Tax Policy Center, shows who mostly gets this type of income.  To be clear, this is not yet the “bitter politics of envy”…so far, it’s just numbers.

Source: TPC, link in text.

Ordinary income, like paychecks, is taxed at a top rate of 35%, going to about 40% if the sun should ever set on the highend Bush cuts.  The average effective rate for federal taxes these days is around 20%, about five points higher than Mitt’s.  Basically, he’s paying what a middle class family—average income, around $65K, pays in federal taxes.

Is this a problem?  Well, the fact that our tax code favors assets over wages is one factor behind the rise in income inequality.  It’s also one reason we’re starved for revenues—this new report from the Joint Committee on Taxation shows that the favorable treatment of cap gains and dividends will cost the Treasury about $450 billion between 2011 and 2015 (that’s the whole American Jobs Act, right there!).  Then there’s basic fairness…(whoops, straying from the numbers!)

And for what?  The evidence doesn’t support the view that favoring asset-based income raises investment, productivity, or job growth.

Frankly, I doubt many people are envious about the above.  I suspect few begrudge the wealth.  What I think bothers people is the tax breaks on the wealth.  And that’s more anger and disgust than envy. Just to be clear.

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17 comments in reply to "Some Prominent Rich People Have Lots of Money and Face Low Tax Rates"

  1. James says:

    What really grates is Romney dismissing $362,000 in speaking fees as “not much” money. If that’s “not much” money, perhaps he wouldn’t even miss it if he paid that much more in taxes. Chump change.

  2. Jean says:

    What really bothers me about this is the feeling of powerlessness I have when I think about the likelihood that this situation could change. Given that Congress is unable to move on anything, and especially unwilling to move on tax reform, there appears to be no way out of this mess. If I felt that we had a government that could and would correct this problem, it would be a minor irritation. Since we don’t, it is a crime.

    And that really makes me mad.

    I envy the countries that have responsive governments, not the Mitt Romneys of the world. Who would want to be like him? You couldn’t pay me enough.

  3. davesnyd says:

    Look, to be fair to Romney, the cited 15% rate does not include the money he has to spend to hire lobbyists and buy members of Congress in order to keep that bracket in place. Or, for that matter, on his own quests to win the White House in order to lower it further. Being rich is expensive.

  4. Sergey Vorobiev says:

    Jared, it will be interesting to get your take on the recent Alan Krueger-Scott Winship argument.

  5. Tyler says:

    A “heavy progressive or graduated income tax” is Plank #2 of the Communist Manifesto.

  6. Bud Meyers says:

    Jared, please tell Obama re: the Keystone Pipeline… It’s WE who should get into the oil business!

    The funding for this massive “works project” can be done with the billions of dollars the government will collect by letting the Bush tax cuts expire at the end of the year. This is very DO-ABLE my friends!

  7. Patrick says:

    Didn’t Mitt pay taxes on the money he made prior to investing this portion? Let’s assume the taxes were 35%. Now he is getting the dividends of that investment and is paying another 15% on it. This seems to be getting lost in the conversation

    • Chigliakus says:

      This isn’t something that’s getting lost in the conversation, it’s something that is simply not true. The money he paid 35% on (more likely 15%, but whatever) isn’t being taxed 15%, it isn’t being taxed at all, that money was already taxed. What he’s paying 15% on is INCOME–it’s NEW money that hasn’t been taxed yet–and he’s paying less tax on it because he didn’t labor to earn it. You can try to tell me that investing is hard work, whatever, but don’t try to tell me the guy unclogging your toilet or treating your cancer (benefiting society) should pay a higher tax rate than some investment banker (nevermind all the damage those guys have done to our economy recently).

    • Jean says:

      We won’t know until we see his tax returns, but dividends are taxed at the earned income rate, and most likely all of his income doesn’t come from buying and selling securities. The problem is that the capital gains rate applies to things other than capital gains … like carried interest. And then there is the problem of how much of his income is sheltered off-shore.

      If Mitt Romney is reluctant to show his returns, and then volunteers that his rate is around 15%, you can bet that there is more going on than just capital gains on personal investments.

  8. Bud Meyers says:

    Keep it simple: Just let the Bush tax cuts expire at the end of the year. Then just tweak (amend) the tax code so that ALL of an individual’s personal income (capital gains, dividends, annuities, trust funds, carried interest, estates, etc.) is taxed as ordinary income, based the current income tax brackets. CHA-CHING!!!

    Mitt Romney: Mister 15% and Platinum Parachutes

  9. Yossarian says:

    Seems like a wonderful argument to lower taxes on wage income. Why should anyone pay more than Mitt Romney, particularly to a Congress that wastes it?

    Conveniently ignored in the Buffet Rule debate is any mention of the corporate income tax rate applied to profits before a corporate investor pays their CGs. Pity.