Remember why Obama and Republican leaders continued to squabble about this. Because over the past year, they couldn’t go big and get real tax reform done.
Chicago Tribune | Editorial
Republican presidential candidate Mitt Romney released two years of tax returns last week Tuesday and they contained few surprises, unless you were unaware that his first name is Willard. So now you know. You probably knew already that he’s quite rich.
Romney gave generously to charity, including the large amounts he donated to his church. His financial advisers opened a Swiss bank account for him, then closed it, apparently because they worried a Swiss bank account is a symbol of secrecy and might hurt him on the campaign trail.
The tax returns unveiled last week also confirmed that Romney pays a lower federal tax rate than many Americans do, because they draw their income from wages and his comes primarily from investments. Democrats say his lower tax burden reflects the unfairness of the tax code.
U.S. tax policy treats capital gains differently for good reason though. Americans who sell a share of stock at a profit after holding it more than a year pay a lower rate partly because that money has already been taxed under corporate income taxes. The lower rates for capital gains also can apply to profits from selling a home, collectibles or ownership of a small business.
The main goal of low capital gains tax rates is to encourage investment. The nation thrives when its citizens put their capital to good use, rather than doing whatever they can to avoid an onerous tax bill. It is much better for everyone if Americans invest their money wisely rather than using it in unproductive ways to fend off the Internal Revenue Service.
The most controversial part of Romney’s tax return is the money he makes from “carried interest,” a share of profits from investment partnerships. In 2010 and 2011, Romney collected almost $13 million from that type of capital gain.
The tax treatment of carried interest has benefited the wealthy owners of hedge funds and private-equity firms such as Bain Capital, which Romney co-founded. In many of these high-profile cases, Romney’s included, carried interest looks and feels like performance-based pay, which would be taxed at the higher rate of ordinary income.
Reasonable people can disagree about how carried interest should be taxed, but keep in mind that it has been a part of the tax code for many years. It applies to partnerships large and small. The idea behind taxing it at a reduced rate is the same as for any capital gain: to encourage investment.
Romney’s wealth has put him on the defensive. Republican rival Newt Gingrich criticizes how he accumulated it, Democrats criticize how he’s taxed on it.
President Barack Obama, who touted tax reform in his State of the Union address last week Tuesday, wants to raise the top tax rate on capital gains to 20 percent from 15 percent for high-income taxpayers. Romney wants to retain the 15 percent rate, only for high-income taxpayers.
The White House estimates that a 5 percentage point tax hike would raise $105 billion over 10 years. But the actual receipts could be lower. Economists generally agree that investors respond to higher capital gains rates by holding their investments longer to avoid the hit, depressing new investment. Higher capital gains rates also increase the cost of capital that businesses need to grow — and grow jobs.
Granted, the parameters of this debate are modest. A 20 percent rate would still be fairly low in historic terms. But it would have an economic impact.
There’s a more far-reaching idea for tax reform. The president’s bipartisan deficit commission, led by Republican Alan Simpson and Democrat Erskine Bowles, unveiled it more than a year ago — and watched it die because the president and congressional leaders failed to buy it.
The Simpson-Bowles plan would tax capital gains at the same rate as ordinary income but would significantly reduce corporate and personal income tax rates. A host of economy-distorting tax expenditures, from the home mortgage interest deduction to business credits, would be reduced or eliminated. The net effect: It would raise $1 trillion over a decade and greatly simplify the tax system. Simpson-Bowles proposed $3 trillion in spending cuts to go with that $1 trillion in revenues.
Remember why Obama and Republican leaders continued to squabble about this. Because over the past year, they couldn’t go big and get real tax reform done.