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How Can You Get Romney's Tax Rate? (Hint: You Can't)

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Mitt RomneyIn the week since Mitt Romney released his tax returns, the media has been abuzz with debate over his career history, his method of compensation, his amazingly high income and his incredibly low tax rate. Amid all the chatter, many pundits -- among them, DailyFinance's Dan Caplinger -- have wondered why more people don't take advantage of the deliciously low capital gains, dividend and carried interest tax rates that Romney enjoys.



The answer, of course, is that most people can't -- at least not on a level large enough to make a difference in their finances.

To begin with, Romney's most controversial income tax break, carried interest, is only available to a few employees of hedge funds and private equity funds. It's difficult to determine how small this group is: Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, notes that carried interest is a subset of capital gains tax, and is not explicitly differentiated in U.S. federal tax documents -- which means there's no easy way to separate out its beneficiaries. That said, the financial services industry as a whole employs about 5.77 million people, or about 3% of all workers in the U.S. Of that 3% few, only a small fraction are eligible for carried interest earnings.

Cream for the Top 20%

But, as some commentators have noted, anybody can take advantage of the low capital gains and dividend tax rates, and many families do: According to the Tax Policy Center, about 16.4% of all taxpayers paid capital gains and dividend tax on some portion of their income in 2011.

These lucky taxpayers are spread across the economic spectrum, but, unsurprisingly, the percentages are heavily skewed toward the richest end: 45% of all people who paid capital gains and dividend taxes in 2011 were in the richest 20% of the population, while only 5% were in the lowest 20%. The middle 20% -- the middle-est of the middle class -- only makes up 15% of investors.

And less well-off investors aren't exactly getting rich off their capital gains and dividends: In 2011, investors in the bottom 20% of the population brought home an average of $1,504 from their investments. On the opposite end, those in the top 20% averaged $43,202. In this case, the middle 20% are effectively lumped in with their poor cousins: Those average middle-class investors claimed about $2,442 in investment and capital gains income.

Tip of the Pyramid

At the top of the heap, the numbers get even more skewed. Among the top 1% -- Occupy Wall Street's bete noir -- 86.2% of people reaped some form of investment income, and the amounts were hardly chicken feed -- an average of $362,682.

But even the 1% paled beside the 0.1%, the super-rich, whose entry point is $1.6 million. On average, 94.5% of this group got some portion of its money from investments. And these investments paid well: The average take in 2011 was $2,275,145.

Romney, by the way, made out superbly even on the 0.1% scale: He made $20.9 million in 2011, and most of it came from investments.

Why the Poor (And Middle Class) Don't Invest

It's worth asking why more middle and lower-quintile workers don't invest their money. After all, a 15% tax rate is far preferable to the higher percentages that most taxpayers pay, especially when one factors in the Social Security and Medicare taxes, neither of which are deducted from investment income.

But investing isn't easy for people in the lower end of the economic spectrum. According to the Bureau of Labor Statistics, for the bottom two-thirds of the country, the average income is $31,718, and the average expenditures on necessities total $28,283. In other words, for two out of three families in America, after food, shelter, transportation, clothing, health care and insurance are paid for, there's only $3,345 left over to spend on things like education, entertainment, savings ... and, oh yes, investing.

By comparison, the average family in the top 5% brings home $228,585, and spends $101,247 on the same necessities. At the end of the year, this leaves them $127,338 -- more than 38 times as much -- to put into discretionary items like investing.

But even if these medium and lower-income families were able to scrape together some money to invest, they wouldn't have quite the same options as those on the higher end. Most hedge funds -- the investments with the highest rate of return -- require a minimum investment of $1 million. Setting aside $3,345 per year -- the entire non-necessity budget of the average lower and middle-class family -- this would take about 299 years to raise.

On the bright side, some venture capital funds have dropped their buy-in to $250,000, which means that a middle-income family could hope to take advantage after only about 75 years of socking away their pennies.

When critics raise questions about Mitt Romney's tax rate, the standard rejoinder is that these disagreements are based in class warfare, or at least in some sort of socialist wealth-redistribution scheme. These attacks aside, the question that Mitt Romney -- and his fellow tax-cut partisans -- need to answer is why the tax code already contains a massive tax break that really only benefits our wealthiest citizens.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at b

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Mike

ROMNEY IS A LIBTARD I WILL VOTE OCOMMY FOR A FASTER FINANCIAL COLLAPSE INSTEAD OF A SLOWER RHINO DEFAULT! TO OLD FOR A LOST DECADE LETS GET IT OVER WITH AND START THE REBUILDING! GOT GOLD?

February 07 2012 at 10:16 PM Report abuse rate up rate down Reply
Mike

FEDERALISM HAS BEEN DESTROYED BY LIBTARDS. Let it default and fade away we have 50 state govts to do the job and leave all the fed parasites unemployed. Win win! Got gold?

February 07 2012 at 10:15 PM Report abuse rate up rate down Reply
davmusgro

The thing is that its legal The washington people made these rules knowing very well the loopholes are there. The tax rates are fine people just have washington top giving their rich friends the loopholes and the bail-outs. Please be honest with yourself ,Its not going to happen. The sit in on Wall St. is nothing more than a political joke ,they know they should be in wasington Think about this If wall street goes down so do you .Your pensions your 401ks you insurance your jobs, your welfare your Soccial Security ,and your homes go through Wall St. and the tax breaks for the rich and themselves goes through washington

February 07 2012 at 6:14 PM Report abuse rate up rate down Reply
Mike

The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount - the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.

It’s been said the US goes to war to protect its oil supplies, but doesn't it really go to war to ensure the continuation of the petrodollar system? GOT GOLD?

February 07 2012 at 12:40 PM Report abuse +1 rate up rate down Reply
Mike

India and Iran are negotiating deal to trade oil for gold. Does this matter, you ask? It strikes at both the value of the US dollar and today's high-tension standoff with Iran.

Officially the US & EU is Tehran must be punished for efforts to develop a nuclear weapon. Sanctions on Iran's oil exports meant to isolate Iran and depress the value of its currency to a point that the country crumbles.

Sanctions will not achieve their goals. Iran is far from isolated and its friends - like India - will stand by the oil-producing nation until the US backs down or acknowledges the real matter the American dollar as the global reserve currency.

In the 1970s a deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on oil trade with the US dollar as the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up. Countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. The dollar's valuation stems from its lock on the oil industry - if that monopoly fades, so too will the value of the dollar. Global fiat currency relationships will change. Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

GOT GOLD?

February 06 2012 at 5:41 PM Report abuse +1 rate up rate down Reply
Mike

India and Iran are negotiating deal to trade oil for gold. Does this matter, you ask? It strikes at both the value of the US dollar and today's high-tension standoff with Iran.

Officially the US & EU is Tehran must be punished for efforts to develop a nuclear weapon. Sanctions on Iran's oil exports meant to isolate Iran and depress the value of its currency to a point that the country crumbles.

Sanctions will not achieve their goals. Iran is far from isolated and its friends - like India - will stand by the oil-producing nation until the US backs down or acknowledges the real matter the American dollar as the global reserve currency.

In the 1970s a deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on oil trade with the US dollar as the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up. Countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. The dollar's valuation stems from its lock on the oil industry - if that monopoly fades, so too will the value of the dollar. Global fiat currency relationships will change. Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

GOT GOLD?

February 06 2012 at 5:41 PM Report abuse rate up rate down Reply
chris1011

From The Economist:

What low capital-gains tax rates mostly do is to encourage people to save their money by investing in assets, rather than saving it in vehicles that pay interest or dividends, or spending it on consumption goods.

Now, one may say, that's good. We want people to save and invest. True enough (though why capital gains are more virtuous than earning interest or dividends is an open question). But we also want people to work hard to earn money and create value. If we don't tax capital gains, that means we need to get the money to fund the government by taxing something else, probably income. And taxing income means there's less incentive to work hard.

Capital-gains taxes have only been 15% since 2003. From 1987-1996, they stayed around 28%. We now have capital-gains taxes that are just over half as high as in the old dystopian socialist days of Ronald Reagan's economy.

February 06 2012 at 1:12 PM Report abuse rate up rate down Reply
2 replies to chris1011's comment
chris1011

If higher capital-gains taxes led to lazy management and widespread misapplication of capital, you would have expected American businesses to have become vastly better managed and more efficient starting in 2003. If this was supposed to lead to higher growth, you would have expected GDP growth in America to be significantly greater from 2003 on than it was in the late 1980s and 90s.

Does anyone seriously think this has happened? It just doesn't sound like a good description of the history of the US economy over the past 20-odd years. What we have seen, however, were two tremendous asset bubbles, the first concentrated on the stockmarket, the second on housing, as people's money was used in ways that let them take advantage of low capital-gains taxes. As Mr Anrig writes:

Advocates of the capital gains tax break have claimed for decades that the exclusion benefits the economy and all workers by encouraging higher levels of investment and savings, which in turn promote growth and prosperity. But researchers have never been able to demonstrate that such connections actually exist. Capital gains tax rates have gone up and down over the years with little apparent relation to economic performance, aside from fleeting effects on realization of capital gains when rates change.

February 06 2012 at 1:13 PM Report abuse rate up rate down Reply
democracks0

THE COPY AND PASTE POSTER CHILD STRIKES AGAIN

February 06 2012 at 7:55 PM Report abuse rate up rate down Reply
1 reply to democracks0's comment
chris1011

I know, you guys just hate to think. If it doesn't fit on a bumper sticker, it won't fit in your mind.

February 07 2012 at 12:16 PM Report abuse rate up rate down
Glen

How does Mitt avoid Alternative Minimun Tax? My income is mostly dividends and I pay AMT. My tax rate is 22%.

February 06 2012 at 1:02 PM Report abuse rate up rate down Reply
Jetncat

you Pay zero if you make under 35K. How much less do you want?

February 06 2012 at 12:25 PM Report abuse rate up rate down Reply
cpo1514

Want Mitts tax rate?? Just pay the top rate on the initial profit and 15% each year there after... right Mr Soros, Mr Buffet???

February 06 2012 at 11:16 AM Report abuse +3 rate up rate down Reply
1 reply to cpo1514's comment
chris1011

I will bet you that Bain never paid the top rate. In fact, no corporation does. There are lots of loopholes in the tax code for any corporation to ever pay 35%. Romney did not get paid in salary, so he never paid the top rate either. He was paid in stock options which were counted as capital gains and were taxed at 15% rate.

February 06 2012 at 1:04 PM Report abuse -1 rate up rate down Reply
1 reply to chris1011's comment
chris1011

Remember,
Corporations are people, my friend (except when it comes to taxes).

February 06 2012 at 1:05 PM Report abuse -1 rate up rate down