Jan. 18, 2012

To be fair to Mitt Romney, it's not his fault that he pays a 15 percent tax rate. This isn't some complex, accountant-driven tax scam. First, it's the fault of President Bill Clinton and a Republican-led Congress who, in 1997, lowered the capital gains rate from 28 percent to 20 percent. Second, it's the fault of President George W. Bush and a Republican Congress, which lowered the rate to 15 percent in 2001. As far as we know -- and we haven't seen his full tax returns yet, so all this is provisional -- Romney is paying the tax rate that our duly elected representatives told him to pay. If we don't like the law, it's the law that needs to be changed.

But if I were a rich investor paying 15 percent every year, I would be a bit peeved at Romney for running for president in the first place. We had a good thing going, man! Most people think the tax code is, on the whole progressive. They know there are higher marginal rates than the ones they pay. And most people don't spend much time thinking about the implications of the fact that many of the richest Americans in the country make their money through investments rather than wages.

In fact, the code does not end up being progressive. Or at least not as progressive as we think. The Congressional Budget Office collects data on the "total effective federal tax rate." That's the tax rate that people actually pay to fund the federal government. It includes not just income taxes, and capital gains, but payrolls taxes and excise taxes. And what it shows is that the tax coe is progressive at the lowest levels and regressive at the highest levels. The middle class, however, ends up having a bad time of it.

In 2007, taxpayers making less than $34,000 paid a 6.4 percent tax rate. Those making between $34,000 and $50,000 paid 13.5 percent. between $50,000 and $75,000, the rate rose to 16.3 percent. So far, so progressive.

But then the progressivity just...stops. If you make $75,000 to $103,00, you're paying 20.8 percent. If you're making between $103,000 and $142,000, you're paying 21 percent. If you're making between $142,000 and $353,000, you're also paying 21 percent. If you're making more than $353,000, your tax rate actually falls a bit, to 20.7 percent. And if you're one of the 400 richest taxpayers in America, your rate falls all the way down to 16.6 percent -- in no small part due to capital gains taxation. (Data -- and a graph -- here.)

This, by the way, actually overstates the progressivity of the total taxes most Americans pay, as state and local tends to be more regressive. Add them in and the share of the tax burden paid by the poor and middle class rises.

There are good policy arguments for taxing capital gains at a lower rate. David Frum makes some of them in his column today. There are also good arguments against it. Warren Buffett has been making them for a long time. But the conversation Romney's taxes will kick off is whether there's a good policy argument for the rich to pay such low effective tax rates amidst a code that is supposed to be, and widely thought to be, progressive, and in a time of skyrocketing inequality. The realization that Romney is paying 15 percent now may end up being a major reason he, and others who make the bulk of their money, are not paying 15 percent five years from now.

Top stories

 

1) Mitt Romney's effective tax rate is near 15%, report Phil Rucker and Lori Montgomery: "Mitt Romney bowed to political pressure on Tuesday by promising to release his federal income tax returns, while estimating the rate he pays at about 15 percent and placing himself among the wealthiest Americans who earn most of their money from past investments. Romney’s disclosure underscored the Republican presidential front-runner’s discomfort with talking about a key aspect of his biography — his money — and reignited the debate over whether his multimillionaire status makes it hard for him to relate to middle-class Americans. Romney’s Democratic and Republican opponents alike pounced on his revelation by saying he has benefited from a basic unfairness in the tax structure. And as President Obama looked to Romney as his likely general-election opponent, the White House and its allies tried to stoke populist anger over income inequality by casting Romney as an out-of-touch multimillionaire. Romney seemed to strike another clumsy note when he described his income from speakers’ fees — about $370,000 in a single year — as 'not very much.'"

WONKBLOG EXPLAINS: How, exactly, is Mitt Romney’s tax rate so low?. @BCAppelbaum: It seems implausible that Mitt Romney does not know (or could not ascertain) his actual effective tax rate.

@nickconfessore: Nota bene: Romney's economic plan would extend the Bush-era 15% rate on capital gains.

2) Many sites will shut down today to protest anti-piracy bills, reports David Fahrenthold: "On Wednesday, a group of technology companies will stage an unusual form of protest: They will shut down their own popular Web sites for a day to show their unhappiness with two Internet-regulation bills grinding through Congress. They argue that the bills would impose huge regulatory costs and stifle innovation on the Web. Around the country, Americans will wake up without some of the oddball essentials of online life. No Wikipedia. No Reddit, a compendium of links to stories and funny pictures that draws millions a day. And no icanhazcheeseburger.com, which is the world’s best-known collection of funny cat pictures. In Washington, however, the day will have another significance. It will culminate a surprising lobbying effort in which technology companies such as Twitter, Wikipedia and Google have used their massive reach into Americans’ daily lives as a political weapon, to whip up support from online users."

INTERVIEW: Sen. Ron Wyden on his long, lonely fight against SOPA, PIPA, and even COICA.

@jimmy_wales: Student warning! Do your homework early. Wikipedia protesting bad law on Wednesday!

3) Passage of the bills is now in doubt, report Jonathan Allen, Jennifer Martinez and Anna Palmer: "Controversial anti-piracy legislation, already on life support in the House, is now in serious doubt in the Senate, where the confluence of a Republican rump rebellion, White House concerns and a Wednesday blackout by Wikipedia, Mozilla and other big-name websites is enough to give some senators second thoughts...It all amounts to this: Congress woke the sleeping tech giant, and now lawmakers are desperate to pacify it. Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) is scrambling to rewrite his bill to soften the blowback from the high-tech sector -- and from senators worried about the political implications of jamming an industry that has the capacity to communicate across the planet in fractions of a second. Representatives of both industries met with aides to Leahy, Senate Majority Leader Harry Reid and Sens. Chuck Grassley (R-Iowa) and Orrin Hatch (R-Utah) on Tuesday to discuss whether there’s a way to bridge the differences between Hollywood and Silicon Valley."

@resnikoff: The neutrality of this website is under dispute. http://en.wikipedia.org/wiki/Main_Page (Couldn't resist.)

4) The effort to recall Wisconsin's governor filed over 1 million signatures, reports Monica Davey: "Critics of Gov. Scott Walker of Wisconsin submitted to the state on Tuesday more than a million signatures, nearly twice as many as required, on recall petitions against him to force a new election. State election officials now begin the arduous, expensive process of studying the petitions for flaws and duplicated names. But leaders of the recall effort said the number of signatures was so large as to put any serious legal challenge out of reach. The anti-Walker forces needed 540,208 names and had estimated that they would produce at least 720,000, so the still larger number came as a surprise to many. Barring a legal fight, Mr. Walker, a Republican who took office a year ago and set off a firestorm by curtailing collective bargaining rights for public workers, will face a new election in the late spring or early summer. Around the country, only two governors have ever been removed through recall."

5) The White House is trying to lower liberal expectations for its upcoming budget, reports Alexander Bolton: "Top White House officials are warning liberal and labor leaders to brace themselves for President Obama’s budget proposal. Gene Sperling, director of the National Economic Council, sought in meetings last week to lift the left’s gloom about Washington’s crackdown on spending by promising that the president this year will focus on job creation rather than deficit cutting. Obama staffers sought to present their budget plan as a glass half full. According to sources familiar with the briefings, they promised that the president will focus on jobs and the economy, instead of deficit-cutting, which dominated last year’s debate on Capitol Hill...Senior administration officials fear a backlash from the left and are trying to prepare their allies to expect a disappointing budget, sources say. 'A senior White House person said we weren’t going to be happy with the budget, but they’re doing the best they can' given the spending caps set by the 2011 Budget Control Act, said one source." 6) Buzzfeed's Andrew Kaczynski got the McCain campaign's 200+ page oppo book on Mitt Romney, and has posted the whole thing online: "A document found online by BuzzFeed appears to be John McCain's entire, 200-page opposition research file — or “book” — on Mitt Romney from 2008, the year they were bitter rivals. Segments of the book have been posted on RedState.com, but this the first time the document has been shared for public consumption in its entirety."

CONSPIRACY THEORY: The Romney campaign figured that, so long as they're getting the tax rate out there, and the speaking fees out there, they may as well get absolutely everything out there in the hopes that it will seem like old news come the general.

Top op-eds

 

1) The scandal of private equity is its unfair tax advantage, writes Pat Garofalo: "The record of private equity firms, such as Bain Capital, suggests that their creative destruction might add value to the economy, but sometimes leaves companies stripped while investors walk away with millions. But the real scandal at the heart of the industry is the way in which private equity managers receive special treatment in the tax code. Managers of private equity firms like Romney are often paid under an arrangement in which they receive both a set fee for their management, as well as a share of the profits that the firm makes for investors. While their management fees are taxed at normal income tax rates, the share of investor gains that go to a private equity manager (called 'carried interest') are treated as capital gains, and thus taxed at a top rate of 15 percent. (Hedge fund managers and partners in real estate ventures also benefit from receiving carried interest.) The argument for a lower capital gains rate is that it encourages investment. Whether that's true or not, private equity managers are allowed to pay the capital gains rate on the profits they make managing someone else's money, not for any risk that they take themselves. Treating carried interest as capital gains is an unjustifiable tax break that needs to be eliminated."

2) Low taxes on capital gains is good policy, writes David Frum: "If the tax rate on long-term capital gains is 15%, and Mitt Romney derives his income in the form of long-term capital gains, then he has no obligation to pay more than 15%. We wouldn't ask a politician who had five children to omit the deductions for one or two of those dependents, on the grounds that he already has enough deductions. We wouldn't ask a politician who qualifies for veteran's benefits to forgo those on the grounds that his salary should suffice. Perhaps you think it's wrong that capital gains are taxed more lightly? In that case, it would be just as wrong if a politician had $15,000 of gains as $15 million. But in fact, it's not wrong. The lower tax rate for capital gains is good policy--a policy that the US has followed almost from the inception of the income tax, a policy followed by almost every other advanced economy on earth (including some that don't tax capital gains at all). " 3) Obama's presidency is not hard to understand, writes Kevin Drum: "Why was Obama so conciliatory toward the Republican Party early on? It has nothing to do with long-term strategy. It's because he needed at least two or three Republican votes in the Senate to pass anything, and if he'd been a fire-breathing partisan from the start he wouldn't have gotten them. He went down this road partly out of native temperament and partly because he didn't really have any choice. Why did healthcare reform take so long? Not because of any clever strategy on Obama's part...But these are the exceptions, not the rule. For the most part, Obama's actions can be explained without resort to mysterious and ulterior motives. He's done what he's done sometimes out of native temperament, sometimes out of straightforward political calculation, sometimes out of plain misjudgment, and sometimes because he genuinely has more centrist views than his critics want to believe. More than with most presidents, I think that with Obama, what you see is what you get. He's just not that hard a guy to explain." 4) The time has come for mass mortgage refinancings, writes Allan Sloan: "Main Street taxpayers have bailed out Wall Street. Now it’s time for Wall Street to return the favor by footing the bill to help millions of honorable Main Street borrowers pay lower interest rates on their mortgages, something that should have happened years ago. Wall Street giving back to Main Street -- imagine that! We’re not talking about anything risky to taxpayers, or a magic fix for the housing market. We’re talking about picking some low-hanging fruit by doing one simple thing: helping borrowers who are current on their payments refinance high-interest mortgages on which taxpayers are already at risk. That would help taxpayers as well as borrowers, because lower monthly payments would stimulate the economy, support housing prices and reduce future defaults. I’m talking about providing a cheap, streamlined and simple way to refinance fixed-rate mortgages backed by Fannie Mae and Freddie Mac, which own about half the nation’s mortgages and are now effectively owned by the federal government." 5) Romney's anti-poverty plan comes up short, writes Ruth Marcus: "'I’m concerned about the poor in this country,' Mitt Romney said the other day. 'We have to make sure the safety net is strong and able to help those who can’t help themselves.' I perked up at those words, because they were something of a departure from his usual stump speech and because they happened to come on a day when I had written about the dire implications of Romney’s proposals for the social safety net. I don’t question his sincerity. The problem: This fine sentiment doesn’t square with his actual policies...Romney would spend hundreds of billions for a tax cut whose benefits flow overwhelmingly to the wealthiest Americans, even as he would cut even more from programs that help the most vulnerable. Those skewed priorities are hard to square with Romney’s stated concern, however heartfelt, for the poor. The man from Bain Capital needs to take another look at his figures." Indie rock interlude: The Mountain Goats play "Going to Georgia" live on NPR.

Got tips, additions, or comments? E-mail me.

Still to come: Prospects are good for a payroll tax extension; food stamps are coming under fire; a record number are receiving government benefits; fuel economy standards get broad backing; and babies try to imitate their father's sneeze.

Economy

 

The World Bank is warning that global growth will slow, reports Annie Lowrey: "In a report released Tuesday, the Washington-based bank lowered its growth forecasts for high-income and low-income countries, saying it expected the world economy to expand an aggregate 2.5 percent in 2012, down from about 2.7 percent in 2011. In its previous estimate, in June, it forecast growth of 3.6 percent in 2012. The bank also warned of the continued threat of a global financial shock 'similar in magnitude to the Lehman crisis,' because of the possibility that a major European economy could be shut out of the global debt markets. In that case, the bank estimated the damage to the world’s economic growth would rival the recession of 2008 and 2009...Economists say they expect many headwinds in early 2012: rising oil prices as the United States and European countries confront Iran; the risk of a tax cut for American wage earners expiring; a strong dollar rendering American exports less competitive; and continued repercussions from the sovereign debt crisis in Europe."

@BCAppelbaum: World Bank: If crisis escalates, "developed- and developing-country growth rates could fall by as much or more than in 2008/09.”

Congressional gridlock could hurt the economy, reports Josh Boak: "Having a divisive Congress back in session could produce some nasty side effects for the nation’s still struggling economy. Americans received a breather during the winter recess, as congressional haggling with President Barack Obama over taxes, spending and regulations took a brief holiday. But Congress is back now -- the House this week and the Senate following in full session next week -- and that strife most likely will resume in the months ahead with little chance of much resolution until after the November elections. And a resulting haziness over economic policies could freeze business investment and crack consumer confidence...Economists at the University of Chicago and Stanford University developed an index to track policy uncertainty, finding that recent spikes have foreshadowed the loss of as many as 2.5 million jobs and a peak decline of 2.2 percent in gross domestic product. Uncertainty has become substantially worse over the course of the 26-year index."

A payroll tax extension looks increasingly likely, reports Jonathan Weisman: "With both parties largely in agreement on a yearlong extension of President Obama’s payroll tax cut, the fight in Congress over the coming weeks will boil down to how to pay for it, and Democrats appeared to hold the advantage as members of the House returned to Washington on Tuesday. Senior Democratic aides say they are entering the tax negotiations in a strong position after House Republicans yielded to bipartisan political pressure and passed a two-month extension of the two-percentage-point payroll tax cut just before the winter break. Republicans, eager to avoid another bruising fight, have signaled that they will drop the most controversial provisions in the version of the yearlong extension passed by the House earlier in December. Those include efforts to block environmental regulations on boilers and carbon emissions and to allow states to impose drug tests on recipients of unemployment benefits." The U.S. is losing high-tech manufacturing jobs to Asia, reports Peter Whoriskey: "The United States lost more than a quarter of its high-tech manufacturing jobs during the past decade as U.S.-based multinational companies placed a growing percentage of their research-and-development operations overseas, the National Science Board reported Tuesday. The rapid expansion of science and engineering capabilities in China and its neighbors pose a more formidable economic challenge to the United States, according to the group, with Asia rapidly boosting the number of engineering doctorates it produces and research dollars it spends...Although the long decline of manufacturing employment in the United States is often attributed to the cheaper wages in developing countries, China and developing countries in Asia have in recent years sought to lure more sophisticated manufacturing operations -- and better jobs -- by expanding their engineering prowess through government investment in education and research." The government is trying to stay under the debt limit, reports Jeffrey Sparshott: "The U.S. government curtailed its investment in a federal retirement fund Tuesday as it looks to stay under the legal debt limit while awaiting a congressional vote on raising the federal spending ceiling. Even if the Republican-controlled House rejects the increase, a measure of disapproval is unlikely to make it through the Senate, where Democrats hold a majority. The White House informed Congress last week that the government was close to its $15.194 trillion borrowing limit, setting in motion procedures that would likely raise the cap by $1.2 trillion later this month. The White House notification gives Congress 15 days to try to block an increase, although President Barack Obama can veto such a measure. The political theater--the House is expected to vote Wednesday, to express its displeasure at raising the limit--is a result of last summer's compromise to raise the debt ceiling in stages." Life is beautiful interlude: One person's year, one second at a time.

Health Care

 

@philipklein: In '06, Romney said final version of Romneycare was 95% his original proposal. Not what u'll hear today.

The food stamp program is coming under the campaign spotlight, reports Damian Paletta: "Newt Gingrich’s labeling of President Barack Obama as the 'best food stamp president in American history' drew a sharp rebuke from the White House, underscoring how the federal food assistance program has again become a political flashpoint. Mr. Gingrich, a Republican presidential candidate, has made similar comments repeatedly during the campaign -- including at the GOP debate in Myrtle Beach, S.C. Monday -- referring to the unprecedented expansion of the food stamp program during the Obama administration...About 44.7 million Americans on average were enrolled in the Supplemental Nutrition Assistance Program, known as food stamps, in fiscal 2011, the year that ended Sept. 30. That’s up from 28.2 million people in fiscal 2008. Benefits paid through the program more than doubled during the period, to $71.8 billion in 2011 from $34.6 billion in 2008."

Republicans are continuing their push for repeal of the CLASS Act, reports Pete Kasperowicz: "House Republicans returned this week with their sights on terminating a part of the 2010 healthcare law the Obama administration has acknowledged is unworkable. The House Ways & Means Committee this week will mark up H.R. 1173, the Fiscal Responsibility and Retirement Security Act. That bill repeals the Community Living Assistance Services and Supports (CLASS) program, a voluntary long-term healthcare program. The Obama administration decided last October that there was no way the program could be viable unless it were bolstered by taxpayer funds, in part because the program was voluntary. However, President Obama has he does not support repeal of the program and has instead indicated support for finding a way to make it viable." Domestic Policy

 

@daveweigel: Q at Chamber of Commerce forum for Perry: What would your NRLB be like? "There wouldn't be one!" big applause

Many states are considering legalizing online gambling, reports Michael Cooper: "It has been more than four decades since states began putting numbers runners out of business by starting their own legal lotteries, which now yield them close to $18 billion a year. Now several states are thinking about trying to plug budget gaps by profiting again from their residents’ optimism -- by legalizing, licensing and taxing Internet gambling. Nevada and the District of Columbia have already taken steps to authorize online poker, and state officials in Iowa have been studying the issue closely. Lawmakers in New Jersey and California are redoubling their efforts to legalize it, bolstered by a recent Department of Justice decision that reversed the federal government’s long-held opposition to many forms of Internet gambling. Gov. Chris Christie of New Jersey spoke this month of making his state an 'epicenter' of the online gambling industry. But as desperate as states are for new revenue, after four years of often painful austerity, there are questions about just how much income they can expect to receive from online gambling."

A record number are receiving government benefits, reports Sara Murray: "The pool of Americans relying on government benefits rose to record highs last year as an increasing share of families tapped aid in a weak economy. Some 48.6% of the population lived in a household receiving some type of government benefit in the second quarter of 2010, up a notch from 48.5% in the first quarter, according to Census data. Expanding government programs combined with the worst downturn since the Great Depression have led to an explosion in the share of Americans relying on outside help. To combat prolonged economic weakness, Congress extended unemployment benefits to a record 99 weeks (up from the normal 26-weeks offered in most states). The food stamp program was tweaked so it was more generous. Americans flocked to Social Security disability, a last bastion of support for some of the long-term unemployed." The White House picked a new acting head for the OMB, reports Ed O'Keefe: "President Obama has tapped Jeffrey D. Zients to serve as acting director of the Office of Management and Budget, the White House announced Tuesday. This will be Zients’s second turn as acting director of the agency responsible for crafting the White House federal budget proposal and handling various government management concerns. Though Zients has no federal budget-writing experience, he led last year’s review of plans to reorganize federal agencies and the drafting of contingency plans ahead of last year’s threatened government shutdown. Zients, 45, takes over for Jacob J. Lew, who was tapped this month to replace departing White House Chief of Staff William Daley. The appointment does not require Senate confirmation. A Washington native, Zients (whose last name rhymes with 'pints') attended the St. Albans prep school and graduated from Duke University. He briefly worked at the consulting firm Bain & Co. in Boston and later returned to Washington." Adorable babies being adorable interlude: A pair of babies make fun of their fathers sneeze..

Energy

 

New fuel economy rules have won consensus, reports Nick Bunkley: "Writing new regulations that will require cars and trucks to have significantly higher fuel economy by 2025 prompted years of fighting among automakers, environmentalists, regulators and consumer groups. But now that the standards have been proposed, nearly everyone involved in the process is on board with the results, as a public hearing held Tuesday in Detroit showed...The proposed new standards call for automakers to increase the average, unadjusted fuel-economy rating of their vehicles to 54.5 miles per gallon by 2025, up from about 27 miles per gallon today. Because of the way testing is done, the 2025 requirement correlates to a window-sticker rating of about 36 miles per gallon, according to the automotive information Web site Edmunds.com, or roughly what Toyota’s tiny new Scion iQ car achieves today."

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

newsletters@email.washingtonpost.com