Mitt Romney ignited a bitter debate about the fairness (or unfairness) of the tax code when he released his tax returns this week. The potential GOP presidential nominee and his wife, Ann, earned more than $42 million in the last two years, but paid a lower tax rate — around 14 percent — than many middle-class Americans. Why? The Romneys' income came from investment dividends and capital gains, which are taxed at a much lower rate than normal salaries. If Bush-era cuts are allowed to expire this year, the "ultra-low" capital gains tax rate will rise to 20 percent, and a provision in the 2010 health-care law will push the rate up another 3.8 percentage points. Is hiking the capital gains tax necessary to make the system more fair?
Yes. This tax break for the rich is outrageous: In theory, Republicans love the idea of lowering taxes on the rich, says The New Republic in an editorial. But even "the GOP base is suddenly appalled" to learn that, thanks to the "outrageously low capital gains tax," the über-rich Romney paid a paltry 13.9 percent on his $21.7 million income in 2010, while the typical middle-income family paid 25 percent. That's simply not fair.
No. Hiking capital gains taxes isn't fair: There are legitimate reasons for keeping taxes on investments low, says Nina Easton at Fortune. "Investment income has already been taxed at the 35 percent corporate tax rate before being paid out to individuals" (since a company's stock value reflects its post-tax profits), so in effect, that money is getting taxed twice. Besides, jacking up the capital gains tax rate could "discourage investment and risk-taking," which we need to keep the economy humming. So let's talk fairness, but without the partisan rich-bashing.
"It's time for an honest tax debate"
The important thing is treating all income equally: "The question isn't whether we should tax capital gains more or less than we currently do (I vote less)," says Timothy P. Carney at the Washington Examiner. It's "whether we should tax capital gains differently" than ordinary income. The answer is clear: "Taxing work more than investment distorts the economy," and that kind of inefficiency "destroys wealth." It's time we "cut income tax rates down to capital gains tax rates."
"Capital gains taxes, fairness, and neutrality"