Here’s the latest big non-news item: Mitt Romney is very, very rich. Like a quarter of a billion dollars rich.
Usually when the topic of wealth comes up, folks are interested in how a person made his or her money. But in Romney’s case, at least for us tax geeks, the focus is on how much tax he pays on his money.
That leads to our next bit of non-news: not very much. The Republican presidential front-runner says his tax rate is “around 15 percent.” We’ll get more specifics when Romney releases his tax returns, something he now says he’ll do once he’s got the GOP nomination in hand.
It’s no surprise that rich people have accountants who help them find ways, legal of course, to reduce their tax bills. But Romney’s tax advisers didn’t have to work that hard.
Most of Romney’s vast wealth comes via investments. And the capital gains tax on investment earnings is in most cases a maximum 15 percent.
Now there’s nothing wrong with Romney taking advantage of that low rate. That 15 percent top capital gains tax rate applies to every investor, whether as rich as the former Massachusetts governor or someone making $50,000 and who has just a few shares of a stock.
The difference, which Romney’s opponents are quick to point out, is that that Average Joe making 50 grand per year likely faces a tax rate 10 percentage points higher than Romney’s 15 percent tax rate.
Joe’s ordinary income falls squarely in the 25 percent tax bracket for the 2011 tax year. Of course, if Joe gets any earnings from his stock or sells it, he, like Romney, will owe just 15 percent on the earnings or sale profit. But that amount of lower-taxed income is not the bulk of his IRS bill. Joe pays 25 percent on the money he gets from his job.
There are good reasons to reward investors with lower tax rates. People who put money into ventures they believe in and expect (hope) will grow and help out the overall United States economy should be rewarded.
And the lower capital gains tax rate is one of the few instances in which saving and investing rather than spending is rewarded by the tax code.
But is the 15 percent rate appropriate?
The tax rate on investment earnings had been 20 percent until George W. Bush got his tax cuts enacted. And the 15 percent capital gains tax rate is in effect, thanks to a deal between President Barack Obama and Congress in December 2010, through the end of the 2012 tax year.
The capital gains rates (there’s an even lower one, 0 percent right now, for folks in the 10 percent and 15 percent tax brackets) are set to head up a bit in 2013. Whether than happens depends in large part on the November election results.
But regardless of what happens at the polls, it’s a discussion that’s worth having now.
Do you benefit tax-wise from investment earnings? Do you think the current capital gains rate is too low?
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