Predictably, critics on the left, and amazingly some on the right, like Gingrich, pounced on Romney's returns as proof that the wealthy don't pay their fair share. Or, as Gingrich put, being paid for "no work". As you all know, this is because Romney's income derives from capital gains on investments, which are taxed at 15%. And as we have heard before, how does it make sense that Warren Buffet pays a lower tax rate than his secretary? Egad! The unfairness of it all!
But a couple of points are worth noting. First, that income from capital gains has already been taxed at the corporate level. And as we all know, U.S. corporate tax rates are either the highest or second highest among developed countries in the world (depending on whether Japan has finally lowered their corporate tax rate, which I don't know). So, by the time Romney realizes a capital gain, the effective tax rate on that money can be as high as 45%.
Second, there is a reason that capital gains are taxed at lower rates. The economy benefits by having capital flowing, as opposed to being locked up. If we raised the cap gains rate to, say, 35% (the upper earned income rate), investors will be less likely to sell assets that trigger the tax. We have seen this scenario play out over and over again. When cap gain tax rates are low, people are more likely to sell assets and pay the tax. This not only keeps capital flowing through the economy, it increases revenue to the government. And as someone once said, you can't have capitalism without capital.
Why Romney didn't explain all of this is a mystery to me. My guess is that he's so paranoid about the class warfare strategy of the Democrats that he's like a deer in the headlights.
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