TAMPA, December 1, 2012 ― President Obama and the Democrats were successful in 2012 largely on the strength of some rather outlandish demagoguery. “Billionaires pay fewer taxes than their secretaries” was one slogan that was particularly successful.
The Obama campaign successfully made an issue out of Mitt Romney’s taxes, finally getting Romney to admit that he paid around 13% of his earnings in taxes over the past several years. The “fair share” crowd contrasted this with the higher percentage that would have been paid by a secretary in the 28% bracket, for example, who would still pay more than 13% even after deductions.
That Americans bought this specious argument is more worrisome than that the Democrats made it.
Romney’s tax percentage was low because most of earnings came from capital gains, not income. Capital gains are just what they sound like. They are the appreciation in the value of one’s capital. If you buy a stock at $5 per share and its price goes up to $7 dollars per share, you have realized $2 in capital gains. If you sell that stock at a $2 dollar profit, the government wants a percentage.
Right now, Mitt Romney would pay 35% income tax and 15% on capital gains. The average secretary would pay 15% income tax and 15% on capital gains. So, Romney’s tax liability as a percentage of income is more than double the average secretary’s. His tax liability on capital gains is the same. Obviously, Romney’s nominal tax payments in both categories would exceed the secretary’s by orders of magnitude.
That’s how things actually are out here in the real world.
So why is the tax rate on capital gains lower than on income? Because “capital,” by definition, comes from previously taxed income.