Media Promote Myths About Romney's 15%

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Taxes: Mitt Romney's admission that his effective tax rate is around 15% prompted the usual class warfare rage from the left. But it also prompted news reports to repeat several myths about the country's income tax code.

As CNN put it in the first paragraph of its story, Romney's 15% tax rate means "the multimillionaire pays a smaller percentage of taxes on his income than many middle-income Americans."

This is a favorite canard of the left these days - that the super-rich often pay taxes at lower rates than do struggling middle-class families.

It was propelled by Warren Buffett, who claimed that his tax rate was lower than his secretary's, prompting President Obama to quickly propose a "Buffett rule" surtax on millionaires.

But like many "facts" about the tax code, this one evaporates upon closer inspection.

First, it's simply false that Romney's tax rate is lower than "many middle-income Americans." The middle 20% of income earners pay taxes at an average rate of just 2.3%. The next highest 20% pay at an average rate of only 6.1%.

Even when you include payroll taxes, the effective rate for families in the middle of the income spectrum is less than 13%, according to data from the Tax Policy Center.

IRS data, meanwhile, show that families with incomes of between $50,000 and $100,000 paid an average 8.9% in income taxes, while those earning between $100,000 and $200,000 paid an average 12.7%.

So where are all these overtaxed middle-class families the media keep talking about?

This fixation on tax rates also overlooks the fact that the wealthy pay the vast bulk of all federal income taxes. In fact, the top 10% of income earners pick up 70% of all federal income taxes paid, and the richest 1% account for more than a third.

At the other end of the spectrum, almost half of families don't owe any income tax at all - or get money back from the federal government.

Now, it's true that Romney's rate - as well as Buffett's-is lower than the average for the richest 1% (which according to the IRS was 24% in 2009). But even this figure is misleading because it doesn't factor in the hidden double taxation on his income.

Like Buffett, most of Romney's income is from investments, not wages, which are taxed at a fixed rate. But before they see any of this income, it's already been taxed at the corporate level, at a much higher 35% rate, which means companies have that much less to distribute to shareholders.

The same holds true with capital gains, with the added problem that the gains aren't indexed for inflation. So if an investor sells a share he's held for many years, he can pay taxes on a capital gain that is, in real terms, zero or even negative.

This double taxation of investment income poses a serious handicap to economic growth, which is why most advanced economies have tried to minimize it.

As President Obama's Economic Recovery Advisory Board noted in its 2010 report on tax reform, "a number of OECD countries" avoid double taxation by crediting individual investors "for all or part of the tax paid at the corporate level against their individual taxes."

And it's why the media's favorite Republican presidential candidate - John Huntsman - called for a 0% tax rate on dividends and capital gains.

"These taxes amount to a double-taxation on most individuals who choose to invest," he explained, which "serves to deter productive and much-needed investment in our economy."

But don't expect any Democrat or any reporter to explain any of this, since it's so much easier and more fun to play class-warfare games.


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