Republicans Are Wrong About Taxes

When Mitt Romney released his 2010 tax return last Tuesday most people were shocked to find that although he made millions of dollars, he only paid a tax rate of 13.9% -- far below what most middle class families would pay. Mitt and his Republican cohorts have been scrambling to justify his tiny tax rate. They say it's just free enterprise and is legal. They are right about the legality, but what they failed to say is that they are the ones who made it legal. It was a part of the Bush tax cuts that lowered the capital gains rate so low (while keeping the rates on earned income much higher), thus giving the super-rich a break that working people don't get.

About a third of Romney's income (about $7.4 million) was from something called carried interest, which is currently taxed as a capital gain with a 15% tax rate. But most top investors, both here and in other countries, don't think that is fair. They think carried interest should be taxed at a higher rate. That was the majority opinion in a poll of 1,209 investors by Bloomberg News on January 23rd and 24th. Here are the results:

Worldwide Investors
15% rate is justified...............21%
15% rate not justified...............66%

United States investors
15% rate is justified...............27%
15% rate not justified...............67%

As we can see, even a representative sample of Mitt's fellow investors think he should be paying more in taxes. This shouldn't really surprise us, since multi-billionaires Warren Buffett and Bill Gates have both been calling for higher taxes for the rich. In addition, a group of millionaires have joined them in asking for higher taxes. It looks like there are some of the rich that appreciate what this country has allowed them to do and want to pay their fair share of taxes to help those who haven't been as fortunate.

But those people aren't alone in calling for higher taxes for the rich. In his State of the Union speech President Obama called for the rich to pay a minimum tax rate of 30%. And a majority of Americans agree with the president. In a new Rasmussen Poll (a poll known to lean toward Republicans), it was shown that 55% of the population agrees with the president, while only 32% disagree. Other polls have shown an even larger percentage calling for higher taxes on the rich.

I'm sure most Republicans in Congress are in that 32%, because their solution to every problem facing this country is to cut taxes for the richest Americans. But they are swimming against the current on this issue, and if they don't temper their tax-cutting efforts for the rich they could find themselves at a serious disadvantage in the coming elections.

The Democrats are in the power position on this issue, and the weird part is that they could significantly raise taxes on the rich by simply doing nothing (except blocking Republican efforts to cut those taxes). The Bush tax cuts, which mainly benefitted the rich, not only lowered the top tax rate for earned income but also lowered the tax rate for capital gains. All the Democrats have to do is let those cuts expire at the end of this year.

As the chart above (from Under The Mountain Bunker) shows, letting the Bush tax cuts expire combined with a raise in the capital gains rate already approved in the Affordable Care Act and another provision that limits deductions for the rich would effectively raise the capital gains tax to about 25% in January of 2013. It wouldn't be quite up to the 30% President Obama wants, but it would be a good start (and if the Democrats hold their ground it couldn't be stopped by the Republicans).

The Democrats have the public on their side in this issue, and if they're smart they beat the drums on this all the way to election day. If they can get some more Democrats elected in November, maybe they can up the minimum tax rate for the rich to at least 30%. If not, at least they can make sure the minimum rate goes to about 25%.