Many people have made much about the lower effective tax rates paid by the rich who can easily shift income from the regular rate to the lower capital gains rate, but much has been ignored in this debate. I will forgo talking about how the problem is understated because in the debate payroll taxes are ignored in this post and focus on the fact that the tax rates we talk about for the rich are rates on taxable income. What we ignore in the discussion, simply because it is hard to quantify is how much lower the tax rates of the rich are because they are better than the average taxpayer at turning taxable income into non-taxable income.
Recently I've read article that contain examples of ways in which this works. Let's look at an article about a tax avoidance strategy that is used by one of the funds that Romney has some of his retirement savings invested in. For now I'm going to ignore the actual strategy and concentrate on a line that was not meant to be a focus of the article: "BCIP Trust Associates III, a Bain fund that holds $5 million to $25 million of Mr. Romney’s retirement savings." The earnings on between $5 and $25 million that Mitt has stuffed into that one account are not included in taxable income.
Wait, it get's better (for Mitt) "Mr. Romney’s I.R.A. holdings, in 25 funds, total from $21 million to $102 million, according to his financial disclosure forms." So, when you see that Mitt paid a tax rate of 14.9% remember that the earnings on between $21 million and $102 million were not included in the base on which that percentage was calculated. Most of us can not stuff tens of millions into retirement accounts and shield substantial portions of our income from all taxation. Where is the outrage over the ability not just for the top earners to pay a lower rate than the average person but over their ability to make so much of their income not count toward the base on which that rate is taxed?
Post-script: The rest of the article is well worth reading. Here are a few choice quotations and a link:
"The technique in question allows nonprofit institutions and large
retirement funds to exploit the advantages of shell companies set up in
tax havens like the Cayman Islands by investing money with private
equity firms like Bain Capital, which Mr. Romney ran."
"For instance, an investor could put $1 in an I.R.A. and purchase a
partnership interest of Bain Capital in the Cayman Islands, which, in
turn, borrows $1,000 to buy 1,001 shares of a company near bankruptcy
that Bain has just purchased. If the shares go to $100, the investor
then has $99,100 after he pays off the $1,000 loan. Such a transaction
would be walloped by the unrelated business tax if done on shore."
Romney’s Returns Revive Scrutiny of Lawful Offshore Tax Shelters