Talking Points Memo has an article, CHART: How Romney’s Tax Rate Stacks Up To Recent Presidential Candidates’, with an interesting comparison.
I maintain that this does not even paint the full picture of how much less the ultra-wealthy pay in taxes than the average middle-class person.
Instead of looking at income as these charts do, it would be interesting to look at how each person’s wealth changes from year to year. I don’t have figures, but I have some explanations that sound plausible to me.
Typically the very wealthy have their wealth tied up in investments. The value of these investments can go up substantially from year to year without causing any reportable income as far as the government is concerned. That increase in wealth that is not income is called unrealized capital gains. It may all be on paper, but the lifestyle of the wealthy is improved by these gains even if they are not realized right away.
The accountants among my readership will have to verify this, or you can believe Kiplinger’s article, Donate Appreciated Assets, but I believe that if a wealthy person gives away to charity some stock with unrealized capital gains, the wealthy person gets to deduct the full value of the stock. The difference in what the person paid for the stock and what the deduction is may be huge, but it has never been reported as income and it has never been taxed. The price the person paid for the stock plus the untaxed gain now becomes a tax deduction.
The wealthy person may have more cash in his or her bank account by giving money away. The extra cash comes from not paying taxes on reported income because of the charitable deduction. Pretty neat trick, huh?
Thus we have Romney paying at a rate of over 30% on the part of his income called ordinary income and 15% of his income from capital gains. Yet somehow the average of the over 30% rate and the 15% rate is less than 14%.
I have not gone into the pluses and minuses of taxing unrealized capital gains, so don’t leave with the impression that I am saying we ought to tax unrealized gains in the same way as we tax realized gains. However, you should go away with the idea that the inequity, as large as it appears in the above charts, is actually much larger than the appearance. Something needs to be done, but the details of that deserve a whole other blog post.
Well, what do you know? I have a couple of previous posts that may fit the bill.