Romney’s tax controversy shines spotlight on tax code that favors wealth over wages

The controversy surrounding Gov. Mitt Romney’s taxes illustrates how the nation’s tax code disproportionately rewards those who are wealthy at the expense of those who earn wages.

Last week the Republican presidential contender released his 2010 and 2011 tax returns, revealing annual earnings in excess of $20 million and tax rates as low as 13.9%.

But if the U.S. tax code is supposed to be progressive – meaning people with higher incomes pay higher tax rates – then how come Romney, a self-declared “unemployed” millionaire, was able to pay a lower tax rate than a full-time worker earning less than 0.30% of Romney’s annual income?

Because the laws enacted during the Bush administration have skewed the nation’s tax code to favor income derived from wealth (such as capital gains and dividends) instead of earnings from work (or wages).

The Bush tax cuts of 2001 and 2003 reduced the capital gains tax from 20% to 15% and capped dividend income tax at 15%. (Capital gains are earnings that result from the buying or selling of properties, stocks or bonds, and dividends are payments to corporate shareholders.)

Since nearly all of Romney’s earnings in 2010 and 2011 came from investments, dividends, and interests, he was able to take advantage of the Bush tax breaks and pay only about 15% in federal taxes despite reporting a combined income of $42.6 million during that period.

But meanwhile, people who earn wages for their work or services are taxed at a progressive rate. Federal tax rates range from 15% for individuals earning $40,000 a year, to 20% for individuals earning $78,000 a year, and up to 35% for the top income bracket.

So the existing tax code actually punishes people who work for a living (by imposing higher tax rates on wages) while rewarding people – like Romney – who live off their wealth (by giving tax breaks for capital gains).

For instance, Romney reported an income of $21.66 million in 2010, which averages to $59,432 per day. According to Romney’s tax documents, he paid only $3 million or 13.9% in federal income taxes that year. But if a mechanical engineer earned $59,342 in wages that year, he would have to pay more than 18.5% in federal income taxes.

“I pay all the taxes that are legally required and not a dollar more,” Romney insisted. “Is it entirely legal and fair? Absolutely.”

It’s legal, but it’s absolutely unfair to people who earn wages.


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