Issues 2012: Capital gains taxes lowest since WWII - - Jackson, MS

Issues 2012: Capital gains taxes lowest since WWII

Updated: Feb 5, 2012 11:00 AM
Presidential candidate Mitt Romney reported he made about $40 million in the last two years, much of it coming from capital gains. (Source: CNN) Presidential candidate Mitt Romney reported he made about $40 million in the last two years, much of it coming from capital gains. (Source: CNN)

Editor's note: This is part of an ongoing series examining the issues that will play a significant part in the 2012 presidential election. Periodically, we will take a closer look at these issues and present them in a way that will help you make an informed decision in November.

(RNN) – The tax returns of presidential candidate Mitt Romney recast the national spotlight on how much - or how little - the rich are taxed.

Daniel Halperin, the Stanley S. Surrey Professor of Law at Harvard University, has been researching tax policy for more than 40 years. He said much of the former Massachusetts governor's wealth might not be taxed at all.

"Clearly he is making money on the low rate of capital gains," Halperin said. "You could say a couple of things about that. First of all, the effective (tax) rate that is shown is much lower than his rate really is, because he has all kinds of income that doesn't appear on the return – all of the deferred compensation he has and also the unrealized gains on his assets.

"If the stock goes up or the property goes up in value, you don't have to pay taxes on it until you sell it. If you have the kind of money he has, you never sell it. And when you die, that gain disappears."

Romney, also the co-founder of the private equity firm Bain Capital, reported he and his wife made more than $40 million in earnings the last two years. For the $21 million made in 2010, they paid less than 14 percent in taxes.

Much of that, more than $12 million, came from capital gains, or the amount made from the sale of stocks, bonds, property or any other asset. Since the 2003 Bush tax cuts, long-term capital gains (anything held for longer than a year) have been taxed at 15 percent, the lowest rate since World War II.

The tax rates on investments have allowed people who earn millions of dollars to pay a lesser percentage than people who make far less from income made through work. Billionaire Warren Buffet has highlighted the difference by pointing out he pays a lower percent of his annual earnings than his secretary.

Along with his advantage of capital gains earnings, Halperin said Romney's return also indicated a lot of tax shelter investments were being made for him through partnerships, like Bain.

Shelters allowed people to get "unintended results" out of the tax code.

"You are getting a lower tax burden than the law was designed for you to get," he said. "You could say, ‘There are opportunities out there, they are legal and there is no reason why I shouldn't take advantage of it.' Another thing you could say is, ‘I made a lot of money, I am doing pretty well in this economy and I should pay what I'm supposed to pay.'"

Another method of avoiding taxation was to keep compensation that is earned through partnerships offshore, Halperin said. By doing that, people essentially get the same tax advantages an IRA has, except there are no monetary limits.

"We recently changed the statute to not allow you to keep deferred compensation [i.e. pensions, retirement, stock options] offshore," he said. "People tell me [Romney] is ‘grandfathered' because his money has been there already, so he is not subject to the new rules."

People in favor of a lower capital gains rate have argued the money is taxed twice: once when it is first earned from work and again when it is pulled from an investment. They have said lower rates encourage investment and spur growth.

Halperin said the viewpoint of low tax rates leading to economic improvement has long been made, but it is difficult to prove.

"The country seemed to be doing pretty well when the capital gains tax was 20 or 25 percent," he said. "I don't see any argument that 15 is essential. If you want to compare the economy from 2003 to today, when we have the lowest capital gains rate in 70 years, it is pretty clear that it has not been the best time for investment. Now that doesn't prove anything, but it certainly doesn't prove the opposite."

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