Romney's tax rate: Good gossip, great lesson

Romney's 15 percent tax rate underscores the fact that even the preferential rate on capital gains and dividend income, is a big tax expenditure–a big way we “spend” money via the tax code.

Well, this is going to raise some voters’ eyebrows:

“What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything,” Romney, a GOP presidential candidate, said. “My last 10 years, I’ve — my income comes overwhelmingly from some investments made in the past, whether ordinary income or earned annually. I got a little bit of income from my book, but I gave that all away. And then I get speaker’s fees from time to time, but not very much.”

(The “not very much” in speaker’s fees is apparently more than $360,000, by the way.)

Besides being good negative gossip on Romney, though, perhaps it will be a teaching moment for all of us about tax policy more generally.  It underscores the fact that even the preferential rate on capital gains and dividend income, even though it seems more an issue about tax rates than tax base, is a big tax expenditure–a big way we “spend” money via the tax code.  Relative to a comprehensive income tax base where all forms of income are taxed at the same rate, the lower rates on capital gains and dividends result in well over $100 billion a year in lost revenue.  (See Table 17-3 in the revenue section of the analytical perspectives of last year’s budget and note that just the first three capital gains provisions add up to $135 billion for just fiscal year 2012.)  So besides the distributional implications that are already unsavory, there are the budgetary implications that should make us question whether these tax preferences are worth their cost.

So let the gossip and thoughtful conversations begin!