During the Republican debate on Monday, Mitt Romney suggested that he might release his 2011 tax return, but only in April. On Tuesday, he told reporters that his effective tax rate was “probably closer to the 15 percent rate than anything.”
Mr. Romney is clearly hoping that by drawing this process out for another three months, and copping to the low rate early on, he will deflect at least some of the shock about the size of his personal wealth and what a great deal you get from the government if, like Mr. Romney, you make most of your money from investing.
Let’s be clear: despite Mr. Romney’s claim that “people will want to see the most recent year,” his 2011 taxes would not be enough. Voters have a right to know how presidential aspirants made their money — not just in the year before the election. That is especially true in Mr. Romney’s case because he says his business success qualifies him to be president.
As for that 15 percent rate, it’s all completely legal. Mr. Romney didn’t even need a sharp accountant. If Mr. Romney has done one good thing with his partial disclosure — although it clearly wasn’t his goal — he has reminded Americans of the fundamental unfairness of the current tax code and of how determined Mr. Romney and his party are to keep it that way.
Currently, the tax code imposes a top rate of 15 percent on investment income — generally, capital gains and dividends — that flows overwhelmingly to wealthy taxpayers. In comparison, top rates between 25 percent and 35 percent are applied to the wages and salaries for many working Americans.
Worse, an egregious loophole in the law lets private equity partners pay the lower 15 percent rate on much of their income — known as “carried interest” — even though those earnings are not typically gains from investing their own money, but rather a share of profits from investing someone else’s money.
Without seeing Mr. Romney’s tax returns, it is impossible to know how much of his investments — past and present — are actually carried interest, though much of his fortune is from his years at the buyout firm Bain Capital, and a significant share of his family’s wealth is still connected to Bain.
President Obama has repeatedly, and correctly, called for ending the carried interest loophole. It is morally indefensible because it asserts that the efforts and risks of private equity partners are worthier than those of workers who pay regular tax rates. It also makes no sense. The rationale for keeping the capital gains rate lower than the rate on wages and salaries is to encourage and reward investors for taking risks with their own money. Private equity partners are, by and large, managing other people’s money risk.
The controversy over the tax treatment of carried interest is a subset of the larger debate over whether there even should be a preferential rate for capital gains. The answer is no. It is not only excessive, and unjustified, it actually encourages wasteful gamesmanship, by enticing people to engage in tax avoidance schemes to convert ordinary income into capital gains. It also exacerbates inequality and crowds out other ways to foster risk-taking.
Mr. Romney has called for keeping the current low rates for capital gains and eliminating capital gains altogether for taxpayers making less than $200,000. That’s an attempt to justify an indefensible tax break for the wealthy by tossing crumbs to others.
Mr. Romney does not have to apologize for his wealth. But he cannot keep trying to conceal just how much the tax code has been tilted in his favor.
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