The WSJ does a great job explaining why Mitt Romney's tax rates are (and should be) low.
Start with the fact that, like Warren Buffett, Mr. Romney said he makes most of his money from investments, not wages or salary. Thus his income is really taxed twice: once at the corporate tax rate of 35%, then again at a 15% tax rate when it is passed through to him as dividends or via capital gains from the sale of stock.All income from businesses is eventually passed through to the owners, so to ignore business taxes creates a statistical illusion that makes it appear that the rich pay less than they really do. By this logic, if the corporate tax rate were raised to, say, 60% from today's 35% and the dividend and capital gains tax were cut to zero, it would appear that business owners were getting away with paying no federal tax at all.
This all-too-conveniently confuses the incidence of a tax with the burden of a tax. The marginal tax rate on every additional dollar of capital gains and dividend income from corporate profits can reach as high as 44.75% at the federal level (assuming a company pays the 35% top corporate rate), not 15%.
James Taranto points out that inflation also gnaws away at capital gains.
In the case of capital gains--profit on the sale of an asset--there is an additional argument. If you bought stock for $1,000 in 1990 and sold it for $2,000 in 2010, you'd pay taxes on the $1,000 difference--even though part of the appreciation reflects the decline in the value of money. A thousand dollars in 1990 dollars is a bit under $1,650 in 2010 dollars, so you'd pay $150 in taxes on real (after-inflation) income of $350, an effective rate of 43%. Taxing the same income at the current top ordinary rate of 35% would wipe out almost all the gains--and this during two decades in which inflation has generally been low.
The problem isn't that capital is taxed too lightly, but rather than income is taxed too heavily.
