As Mitt Romney is Accused of Paying Lower Taxes, Sparks Fly in the Income Tax Arena

Mitt Romney's annual income goes public while political proponents from the left to the right take on capital gains and dividends taxes.

This week, Mitt Romney released his 2010 and '11 tax returns and many are shocked to find that out of his annual income of $21 million (about 420 times higher than the typical U.S. household), he only paid about a 15% tax rate. But you see, I ain't shocked. I ain't shocked one bit because the truth of the matter lies in why and how this is so. First thing you need to understand is that Congress, via the tax code, has almost always treated investments more favorably than labor, believing investments to be more conducive towards economic growth, which in turn benefits everybody.

A little bit of history: According to the Encyclopedia of Taxation and Tax Policy, the reason Congress started taxing capital gains at a lower rate than wages was that, after World War I, it was concerned that high taxes on capital gains would actually reduce revenue because people would simply hold onto their investments - thus restricting the flow of capital. During that time period, however, the top tax rate on wages was an alarming 73%. In 1922, Congress lowered the top capital gains rate to 12.5%, which lasted until 1934. Then, for most of the next 70 years, the top tax rate on long-term capital gains ranged between 20 and 30%, but reached as high as 39.9% in the 1970s and never fell below 20% until 2003, when Congress passed a gradual reduction to the current rate. The 2003 law also began taxing qualified dividends at the same rate as capital gains.

The main reason for Mitt Romney's low taxes is that the majority of his income came from investments. As most ya'all probably know, the U.S. has had for a long time, a somewhat graduated income tax where people who make more money pay taxes at a higher rate than those who make less. But what some of you might not know is that for almost just as long, capital gains - the profit from selling an investment - have been taxed at a lower rate than wages.

But are capital gains REALLY taxed lower?

William McBride, an economist over at the conservative Tax Foundation, offers somethin' interesting: "There are two ways to look at [it]: There is a moral argument and an economic growth argument, and they both point to lower taxes on capital gains." He also mentioned that it's unfair to tax income more than once and that capital gains are taxes multiple times. If you amassed your original investment from wages, then that money was taxed (keep in mind that those wages were actually taxed twice if you got a pay stub and noticed that there was income tax AND payroll tax on it). If you own stock and that stock rises in value because the company you invested in makes a profit, then those profits are taxed through the corporate tax. Finally, if that company issues dividends, then those are taxed too.

Hmmm. I don't know about you but that seems like a hell of a lot of taxing to me.

Under the current tax law, the highest tax rate is 15% on qualified dividend and long-term capital gains - these are profits made from selling assets that have been held for at least 1 year. On the other hand, the top income tax rate on wages is 35%, BUT that only applies to taxable income ABOVE $388,350.

Unfortunately both sides of the political fence make some decent points. Liberals and some moderates argue that lowering taxes on investments help the rich because they are the ones who get the most benefit. This could be true given the fact that last year, 2/3rds of all capital gains went to people making more than $1 million, according to the nonpartisan Joint Committee on Taxation.

Conservatives, on the other hand, are arguing that increasing investment taxes would make it harder for businesses to raise capital, restrict job growth and hurt financial markets. It would reduce income for not only billionaires and millionaires, but also people who rely on pension funds and 401(k) accounts.

So here's an interesting angle. What if the ENTIRE argument on raising or lowering taxes on capital gains and dividends has nothin' to do with how much we make? What if the real target ya'all need to look at is gettin' more people to work so they can make more money regardless of gettin' into a rich-versus-poor tussle? Now that's facin' a problem head on like a deer. I think Jim McCrery, a former senior Republican member of the tax-writing House Ways and Means Committee when the 2003 tax cuts were enacted, is thinking outside of the box when he says, "In my view the rationale for taxing capital gains and dividends at a lower rate has nothing to do with what an individual pays versus another individual. It has everything to do with the creation of jobs in this country."

Now I'm not trying to come off as a Ron Paul supporter here, but often times when two cowboys are duking it out at a bar, we tend to overlook the pretty lady in the corner that started it all. And in this case her name might be, Unemployment.

Catch ya on the back side,

- Patton

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