We’ve been hearing endless yammering about two seemingly unrelated things: that 47 percent of U.S. households don’t pay income tax, and that Mitt Romney paid a lower effective tax rate on his $13.7 million of 2011 income than most American workers pay for just Social Security and Medicare.
But you know what? Romney and the 47 percent are joined at the hip, as well as at the checkbook. How so? They’re both taking what the tax code gives them, and the result isn’t pretty.
Ironically, the reason so many U.S. households don’t pay income tax is attributable largely to policies pushed by two presidents beloved by low-tax types: Ronald Reagan and George W. Bush. Reagan expanded the earned-income tax credit, and Bush doubled the child-care credit. Romney either didn’t know this when he made his denigrating remarks about “the 47 percent” or else chose not to mention it. Putting things in perspective doesn’t make for good applause lines.
Now, to Romney’s taxes. He has the cluelessness — or maybe it’s gall — to boast about not deducting some of his charitable contributions, in order to boost his effective tax rate to 14 percent. Give me a break. People earning less than $110,100 pay an effective rate of 15.3 percent in just Social Security and Medicare tax on every penny of salary they make (including the employer’s portion, which analysts say comes out of workers’ pockets.) Plus in many cases, they pay income tax, too. So forgive me for not being impressed by Romney’s 14 percent effective rate. The fact that he could have paid only 10 percent, perfectly legally, is pretty appalling.
But we need some honesty and consistency in this discussion. If you’re fine with the 47 percent taking full advantage of current tax law, you lose your standing to rag on Romney for doing the same thing. If you say that it’s perfectly fine for Romney and other supposed job creators to pay less than average workers pay just for Social Security and Medicare, you don’t have standing to complain about the 47 percent.
The real problem here, I think, is that by using the tax code to advance social policy rather than to merely collect revenue, we’ve lost sight of the idea that all of us Americans are supposed to be engaged in a joint enterprise.
In an intellectually and morally honest system, we’d collect taxes from everyone. Then we’d mail checks to lower-income people rather than giving them tax credits. We would also send checks to compensate people for some of their mortgage interest, real estate taxes, charitable contributions and dividend and long-term capital gains income, rather than giving them tax money indirectly, via the tax code.
However, mailing checks would count as government spending — tax breaks don’t. In addition, higher-income people would get bigger government checks than lower-income people would. That sure wouldn’t play well.
So we bury social policies in the tax code and obscure what techie types call “tax expenditures.” Among the things obscured, according to the Tax Policy Center, is that one-tenth of 1 percent of taxpayers get half the benefit (call it $38 billion) of having dividends and long-term capital gains taxed at preferential rates. The center says non-paying households are down to 46.4 percent, but I’ll keep using Romney’s 47 percent.
In my ideal world, everyone would pay at least a nominal income tax, in recognition of the fact that all of us Americans are engaged in a common enterprise. We would reduce or totally eliminate the advantage that income from investments has over “earned income” like salaries. And we’d certainly close the noxious “carried interest” loophole that allows Romney and a handful of other ultra-high-income types to pay ultra-low taxes on their piece of the profits realized by investors in buyout funds and hedge funds.
Making changes like these would require having compromise and civil discourse return to our national conversation. I’m a congenital optimist, so I’ve convinced myself that this will actually happen. Someday. Until then, though, we’ll have to put up with endless yammering about “the 47 percent,” Romney’s tax returns and other topics du jour. More’s the pity.
Additional reporting by Doris Burke. Sloan is Fortune magazine’s senior editor at large. To read his previous columns, go to postbusiness.com.