When Warren Buffett said in 2011 that he pays a lower tax rate than his secretary, all hell broke loose. And when Mitt Romney recently said that he paid a 15% tax rate on his income, the same hell broke loose and he was surely talking about the same thing.
Because Buffett was referring to the 15% that Romney was, and that is a completely different tax (a capital gains tax) than what most people pay (which is a personal income tax) or what Buffett or Romney originally paid on their business income (a corporate income tax or business income tax).
That 15% is called a ‘capital gains tax rate’. You certainly have heard the phrase. It works like this:
It has been revealed that Romney had taxable income of $21.7 million in 2010. And when you compare it to Bill Gates’ fortune of roughly $45 billion, then there is a big difference. Thus Romney is a piker in comparison; his whole fortune is estimated at around $270 million. Yet if Gates ran for president the Democrats would make every excuse for his money because he supports Obama.
Romney earned $21.7 million on his “investments” in 2010. And on that $21.7 million he paid about a 15%’capital gains tax’ or about $3 million in federal taxes.
The “investments” that produced the $21.7 million refer to Romney’s “personal fortune” of $270 million. And this fortune came after he and his firm paid huge amounts of taxes, salaries, benefits etc. over several decades on much higher ‘gross revenues’ (probably in the billions) from his successful company Bain Capital, leaving Romney with his cumulative personal wealth of $270 million.
In other words, his “investments” or his “net worth” or “personal wealth” is money left over from all of his business activities, i.e., it is Romney’s “profit” from his decades in business.
Romney’s income in 2010 of $21.7 million was about 8% of his $270 million personal fortune or his “nest egg”. And that $270 million is invested in various investment accounts to provide him an annual income stream – it is invested in stock portfolios, bank accounts, bonds, real estate interests etc.
Of course liberals like to say that that $270 million is under Romney’s mattress and that he is using it only to buy jewelry and caviar for his wife.
But that is nonsense. This $270 million is ‘investment capital’ that is doing positive things like helping companies to start up or to grow and prosper and provide jobs. That is why it is best kept away from the government.
If there were no investment capital, the economy would collapse. Because most people who want to start or expand a company, from Steve Jobs to the guy on the corner with a convenience store, eventually need investment capital to buy tools or machinery or inventory, or to build a factory or a store etc.
They take out a loan and hope that their company does well enough to pay the loan back and then make a profit. Or they issue stock in their company which is purchased by people like Mitt Romney in big quantities, or by your neighbor in smaller quantities.
And saying that Romney’s personal fortune is simply funding his exorbitant lifestyle is like saying that your life’s saving are being used to fund your exorbitant lifestyle when actually your bank account (your deposit in the bank like your life’s savings) is being lent out by the bank for people to buy houses or start businesses, i.e, to grow the economy. And the bank makes a profit on that loan (interest on the loan) and some of that profit is turned over to you as interest on your bank account.
So your bank account or Romney’s bank account and other investments are earning income (interest, dividends, profits etc.) because they are invested in productive economic growth.
And thus if the government takes that money away like communism does and like Democrats want to, then there is no investment capital and the economy collapses. That is why socialist nations always have poor growth stats and communist nations are always destitute.
So the ‘capital gains tax’ is a second tax on income. And liberals favor it because Romney made the ‘capital gains’ on his “investments” without going out and working for it every day and so, in their view, he must be punished.
Indeed since Romney does not go to the office every day but lives off of his investments then his income is not taxed as ‘personal income’ but as ‘capital gains’. That is why Romney is taxed at 15% which is the capital gains tax rate.
And this is precisely what tens of millions of retirees in the middle class do every year in their retirements – they live off of their investments.
By the way, Romney also gave almost 14% of his $21.7 million annual income to charity in 2010 or almost $3 MILLION, while vice president Joe Biden gave .3% (that’s three tenths of one percent…) of his income to charity annually during the last ten years of his US Senate career ($369 a year average). In 2010, Biden gave only 1.4% to charity, or one-tenth of what Romney gave. While the Democrats portray Romney as a selfish businessman.
Thus if Warren Buffett’s secretary indeed paid, say, a 16% tax rate on her personal income (the Buffett story is a huge distortion of the facts made up for public consumption) then she would technically pay more than his capital gains tax rate. But remember that his capital gains rate is a second tax on his income, not his primary tax.
So if for instance you are a doctor and you make $200,000 a year, you would be in the top personal income tax bracket which is a 35% tax rate (the top personal rate and the top corporate/business rate just happen to be the same right now at 35%. But this has not always been true by any means.).
But after deductions, you might pay a 27% federal tax rate. Obama paid 26% on his 2011 return, even though he was in the 35% personal income bracket. Because he had deductions and took every one of them even though he and all his rich Democrat friends always say they don’t need any breaks. But Obama took them anyway like all his cronies do.
And after all your doctor taxes are paid and you’ve paid for your house and your kids’ education and cars and groceries and everything else, you might put some leftover money like $30,000 in a certificate of deposit or buy stocks with it and do the same thing every year to build up your “nest egg”.
So while you paid 27% on your original income, you will pay 15% on the annual income stream from your “nest egg” in that same year. This is your 15% ‘capital gains tax’. It is separate and second tax from your income tax or your Social Security or Medicare tax or any other tax.
But the media are making it look like Romney is a skinflint for paying 15% when millions of people, particularly retirees, do the same thing. But the more the hyperactive media attack Romney now, the less impact their attacks will have closer to the election if he is the nominee. So let them attack him and get it over with.
Many of us believe that the capital gains rate should be zero, that you should not have to pay a second tax on your success. This may be in the future. It will greatly help our economy to make it zero. Because a low-tax economy always produces more wealth and jobs than a high-tax economy. History has proven this over and over.
Please visit my blog at www.nikitas3.com for more conservative insights.