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Some income is special (02/01/2012)
by Richard Schneider

Emeritus Professor of Accounting - WSU

With the release of Willard (Mitt) and Ann Romney’s tax return for 2010 and projected tax return for 2011, a number of questions occur about why certain income is special and taxed at a much lower rate. Mitt seemed embarrassed that his tax rate was so low. Even billionaire Warren Buffet has complained about paying too little tax on all of his investment income. The culprit is the 15% maximum tax rate on long-term capital gains. The rationale for the lower rate on these gains would appear to be, that the gains have accumulated over a year and some cases many years. When the asset or investment is sold, the income is counted in the year of sale and causes a big blip in income and a much higher tax rate in that one year. Had the gain been taxed as it accrued it would have been spread out over the life of the investment, being taxed presumably at a lower rate. This argument might hold water for taxpayers in lower brackets, but leaks like a sieve when it comes to the high-income taxpayers, such as Romney and Buffet. They and others like them have huge long-term capital gains year after year after year, and only pay a small percentage in income tax.

How much long-term capital gains and qualified dividends (treated as long-term capital gains), did the Romneys have in 2010? It was $15.9 million out of $21.6 million of adjusted gross income. In 2011, it’s estimated to be $12.6 million out of $20.9 million of adjusted gross income. To be fair I did calculate his tax rate based on taxable income to be 18.1%, before a credit for foreign taxes paid on this income. These figures came from their released tax returns.

One of my friends suggested that I also look into Barack Obama’s taxes, and why didn’t he release his tax returns. Well, they are public and have been for a long time and are available on the web. The Obama’s 2009 return is at http://www.whitehouse.gov/sites/default/files/president-obama-2010-complete-return.pdf . In 2009, the Obama’s had $5.5 million in adjusted gross income with about $5.1 million from writing a book, this was taxed as ordinary income, he had no positive capital gains. His tax rate was 34.4%. In 2010, again most of the income was from publishing, with adjusted gross income of $1.7 million.

Some income is so special there is no tax on it at all, such as interest on state and municipal debt and Puerto Rico bonds. Some politicians advocate for all investment income to be tax free, including Newt Gingrich. The Tax Policy Center reported that under Gingrich’s proposal, investment income would be taxed at 0%, thus giving him about a $500,000 tax break. Of course, Mitt and Warren would be paying a tax rate of just about 0%.

Will the public create enough of an outcry, to have the special incomes taxed at normal rates? Will the public be convinced that these people with abundance need more money, and do not have to pay taxes like the working class? There is talk about class warfare, and this is an example of class discrimination.



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