The red-hot Republican primaries, plus President Obama's focus on tax fairness in his State of the Union address, revive an old question: In our ostensibly progressive income tax system, do rich people really pay at higher tax rates?
Judging from tax returns filed by Obama, Newt Gingrich and Mitt Romney, the answer is yes and no.
Obama, who on Tuesday advocated a minimum 30 percent rate for taxpayers with $1 million a year or more in income, reported adjusted gross income (with his wife, Michelle) of $1.73 million in 2010. They paid $453,770, or 26.2 percent. Gingrich (and wife Callista) reported $3.16 million in income. They paid $994,708, or 31.7 percent.
Then there's Romney. He and his wife, Ann, are rich with a capital R, collecting $21.7 million in 2010. On that they paid $3 million in federal income tax, just under 14 percent - significantly less than their poor-cousin millionaires, Obama and Gingrich.
Granted, 1) all three families paid Uncle Sam a bundle and they contribute to charity, 2) any tax-minimizing strategies involved are likely legal, 3) no one is obliged to pay more than the law requires and 4) many middle-income folks pay an effective rate of under 10 percent.
And yet - by taxing investment income at a maximum of 15 percent, the tax system allows people who can live off capital gains, dividends and interest to pay at lower rates than do high-earners who get their money from salaries (for which the top rate is 35 percent). That hasn't always been the case: during the latter part of the Reagan administration, for example, capital gains and upper incomes both were taxed at 28 percent.
Over the decades, tax rates (and deductions) have varied widely. It's not easy to translate "fairness" into specific rates - or to enact a surcharge on million-dollar incomes. And there are solid reasons for taxing investment income at lower rates than pay.
But it's useful, too, to answer this question: If the flat tax systems proposed by several candidates, including Gingrich, were enacted, capital gains would not be taxable to individuals - and thus more than half of Romney's $21-plus million income would be tax-free. Would that be "fair"?
Not by any standard that would seem fair to most other taxpayers. That's why Romney's 14 percent rate helps feed the fairness debate.
