Recently there has been a flurry of outrage concerning the fact that some very wealthy individuals, notably Mitt Romney, pay Federal taxes at the 15% middle class rate, because of a law that put a cap of 15% on taxes on capital gains and qualified investment income. Before jumping on a bandwagon calling for a repeal of the law, people need to understand something of its history and how it operates.
In its initial form the law took effect in 1997, during the Clinton Administration. While the Congress that framed it had a Republican majority, there was no notable opposition from the Democratic side. Part of the rationale was to encourage investment, and in particular to encourage people to sell stagnant investments and reinvest the proceeds in the most actively growing parts of the economy.
In its initial form, the law benefited only the well-to do, as I discovered when I filled out my 1997 income taxes. I had sold some appreciated stock to finance a friend’s mortgage, a move which produced substantial capital gains on paper, but my total income was still in the 15% bracket and I had difficulty paying the taxes since the effective income I had to live on was much less than what I was being taxed on. At that point, the tax structure encouraged reinvestment and portfolio management at upper income levels but still made it difficult for people in the middle.
At some point between 1997 and 2004 the law was modified to give people in the 15% bracket a break on capital gains and investment income as well. The typical person in this category is a retiree liquidating an investment portfolio to maintain a middle-class standard of living. That portfolio is the person’s retirement savings, and while in most cases no real sacrifice was involved in accumulating it, it does represent the sort of prudent financial management society would hopefully like to encourage. Some of the capital gains is simply the result of inflation. People have based their retirement savings strategies in part on the existing tax structure, and don’t have the flexibility the tycoons have to move funds around in anticipation of legislation.
Before using a few conspicuous examples of very wealthy individuals who are favored by the tax system as the rationale for trashing a law that also benefits people in more modest circumstances, I would like to see a breakdown of the numbers of individuals and dollar amounts involved under the current tax structure, and be very certain that either (a) the modifications to the law preserved the tax break for middle-class retirees, or that (b) the people who supported the law were clear that they wanted to saddle this large demographic with an unanticipated and potentially burdensome tax liability. I would also hope that the law was free of the sort of loopholes that would enable the very wealthy, who were allegedly being targeted, to escape a large chunk of the effects.
“Weishaupt.” Flickr Creative Commons. Some rights reserved by illpig
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