Romney’s run renews capital-gains tax debate

Presidential candidate Mitt Romney recently released his tax returns. But what do they mean by effective tax rate?

Kai Ryssdal: Well ahead of tax time for the rest of us, .Mitt Romney's deep into the innards of his Form 1040s.

He said yesterday -- after months of hemming and hawing about it -- that he figures he pays taxes at a rate of around 15 percent. That's far lower than most middle-income families do. Romney's explaination was that his money comes from a different source than most other Americans: investments.

But why do some -- but not all -- investments, even get a special tax rate at all? Our senior business correspondent Bob Moon has been asking around.


Bob Moon: It's been this way almost since the advent of the federal income tax a century ago. Capital gains -- profits from selling an investment asset, like stocks -- have been taxed at lower rate than income from your work.

Laura Tyson: Why would you want preferential treatment of certain kinds of income? The argument has to be because you think the preferential treatment is good for the economy overall.

Laura Tyson is a business professor at the University of California at Berkeley and a former economic advisor in the Clinton administration. She says proponents have long argued for special capital gains treatment.

Tyson: On the grounds that lower tax rates will encourage more savings and more investment, and that those forms of behavior are good for the overall economy and will have trickle-down benefits.

Tyson contends evidence of any economic benefits is weak and inconclusive. At Syracuse University, professor Len Burman says the numbers are conclusive on one point.

Len Burman: If you look at the data, the overwhelming majority of capital gains reported on tax returns are reported by people with very, very high incomes.

And pay just 15 percent, much lower than the top income tax rate of 35 percent. He points out the stock market investments that most Americans have, don't get the same kind of treatment.

Burman: In the case of a 401(k), you're ultimately taxed at ordinary income rates.

Burman favors the kind of tax reform that Ronald Reagan pushed into law briefly back in the 1980s. It's the same idea recommended by President Obama's bipartisan budget advisory panel: Lower income tax rates overall, but then tax everything -- including capital gains -- at the same level.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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