Mitt Romney’s income tax return, showing an effective tax rate of 13.9 percent, doesn’t exactly bolster Republican arguments that taxes are sky high. But it may not boost Democratic bids to raise income tax rates, either.
Romney, like many high-income Americans, didn’t earn a dime in wages. Most of his income came from investments, which are taxed at a lower rate than ordinary income – 15 percent vs. a top income tax bracket of 35 percent. He also benefitted from carryover losses, carried interest payments, offshore investments and provisions of the tax code that are of little or no help to most ordinary taxpayers.
By all appearances, raising the marginal tax rate would have no effect on Romney. Increasing the capital gains rate would. In the 1986 tax reform hammered out by Democratic Sen. Bill Bradley and the Reagan administration, capital gains were treated the same as ordinary income. A lower rate was adopted during the Clinton administration, and it was reduced further under President George W. Bush. Don’t look for any bipartisan deal to raise the rate – GOP presidential candidate Newt Gingrich wants to eliminate taxes on capital gains altogether.
In California, raising the top income tax rate is a cornerstone of Gov. Jerry Brown’s tax plan. But here, too, capital gains are a big driver of state revenue. Again, it’s because investments account for a much bigger share of income than wages and salaries for people in the top brackets. That’s why state revenue officials are watching Facebook so closely right now. They’re waiting for one big status update: Will the company go public, creating a lot of new millionaires, who will owe capital gains taxes.
– Jim Sweeney